Growth-stocks have been the stand-out performance sector in the recent short-covering rally. This rally, which has seen the Dow Jones rise to an impressive 24,000 points, has been spurred on by investors’ optimism as the United States moves out of the shadows of the coronavirus pandemic.
Growth stocks are typically ones that have exhibited strong earnings fundamentals and that have yet to fully mature. They are usually expected to outperform the broader market in the short to medium-term.
The sharp increase in growth-stock share prices is indicative of investors’ renewed confidence in the economy. There is an expectation amongst investors that such stocks will continue to benefit from a gradual economic recovery in the US and elsewhere.
Indeed, many American corporations are continuing with their expansion plans, spurring further investment in growth-oriented stocks. There is also a rally in sectors such as technology, retail, and financial services which are all typically drivers of growth-stocks.
Furthermore, the US Senate recently passed a $908 billion stimulus package which should provide further fiscal support. This should have a positive impact on the economy and lead to further rises in growth stocks.
This latest market rally has highlighted the importance of having a well-diversified portfolio. While growth-stocks have soared during the rally, defensive stocks have lagged behind. Investors should therefore consider strategies such as ‘sector-rotation’ which involves rotating out of stocks that have recently appreciated in order to invest in those that offer greater growth potential.
In summary, growth-stocks have undoubtedly provided the standout performance during the recent short-covering rally. Investors should consider this when constructing a diversified portfolio, or alternatively take advantage of the opportunities offered by sector-rotation.
