Explore Our investment Outlook
It’s reasonable to expect some volatility going forward, given the stock market is at record highs despite uncertainties around economic growth, inflation and the pandemic. That’s why we believe it’s important to emphasize a three- to five-year investment horizon, focusing on companies with solid long-term growth and business prospects. Examples of such companies include those engaged in democratizing technology, enterprise digital transformation and the ongoing move to digital payments.
Technology infrastructure, software and tools previously accessible only to large firms are increasingly available to small businesses and micro merchants. The trend toward democratizing business technology is enduring and should accelerate as the economic recovery broadens. Our goal is to identify companies well-positioned to capitalize on this trend and service this ever-growing market.
There is no end in sight for the migration of IT infrastructure off-premise and into the cloud. Other enduring IT trends creating growth opportunities include the shift to e-commerce and customer 360 (i.e., connecting all customer touchpoints such as brick and mortar, mobile, e-commerce and social media).
The benefits of digital payment methods are clear—speed and ease of use, fraud protection, lower transaction costs and frictions, and more efficient use of business capital. Much of the initial adoption of digital payments was in business-to-consumer services, which accelerated during the pandemic. Business-to-business transactions are also increasingly digitized, enabling significant efficiency gains in corporate finance functions such as accounts payable and receivable.
Easy monetary policy and generous fiscal spending have buoyed the market since mid-2020. Confident investors have been willing to take on risks, including bidding up the prices of lower-quality companies at the greatest risk from the economic downturn. We think this behavior has created an opportunity for investors who focus on overlooked higher-quality businesses.
We base our view of quality on a company’s financial strength, competitive position and standards for environmental, social and governance (ESG) issues.* We’ve always valued these characteristics, and we think they will become critical to the broader market in 2022.
In the months ahead, we believe investors will assess risk more prudently as stimulus fades, economic growth moderates, and interest rates and inflation rise. In our view, this creates an opening for quality-focused investors because high-quality stocks are now trading at the biggest discount to low quality in more than a decade.
We also note value stocks are trading at historically wide discounts to growth stocks. We believe this could be positive for value investors if valuations between value and growth stocks return to a more normal level.
Historical data shows performance based on market capitalization is cyclical. Large caps outperformed from 2011-2019, a period of below-average economic growth, low interest rates and low inflation. We saw a rotation to small caps in late 2020 and into 2021 with the introduction of COVID-19 vaccines.
Could the small cap performance trend continue? Historically, small caps have been economically sensitive, posting attractive relative returns when economic growth is strong, interest rates are rising and inflation is trending higher. In our view, these conditions are in place as we enter the new year.
The U.S. economy contracted in 2020, but we’ve seen a strong reversal, and forecasters believe the final reading of 2021 economic growth will be approximately 6%. They expect continued but moderating growth in 2022. The 10-year Treasury has roughly doubled in the last year. And inflation recently hit a 13-year high. We think these are favorable conditions for small caps.
*Quality - Nationally recognized statistical rating organizations assign quality ratings to reflect forward-looking opinions on the creditworthiness of loan issuers.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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