Large-cap growth stocks get managers’ support

It is tough to know whether this observation is scary or reassuring, but never before, that I can recall, has there been this high a level of agreement among investment managers on the equity market.

Almost to a person, they believe that large-cap growth stocks are poised to take off and that equity in general will strongly out-perform bonds or real estate investment trusts this year.

Perhaps the best reflection of their consensus is to be found in Russell Investment Group’s most recent survey of investment manager sentiment. The poll found an astonishingly high level of support for large-cap growth stocks, with eight out of 10 managers bullish on the asset class.

That support represented the highest degree of bullishness shown for any asset class at any time in the two-year history of the survey. My memory extends some distance beyond that and I cannot recall anything like it.

We have encountered a similar sentiment in discussions with those who manage Russell’s mutual funds. And our research at Russell has driven us in the same direction.

If you do the math, it is easy to see why this consensus is out there. Value stocks have outperformed growth stocks for almost six years, which is about the longest period they have ever outperformed historically. Surely the time to turn must be here. Growth stock price-earnings ratios are relatively low; those of value stocks are relatively high. And the tendency always has been for large companies to fare better than their smaller counterparts toward the end of an economic recovery cycle.

No wonder there is consensus. Given the technical factors and the historical record, how can any self-respecting market analyst think otherwise? So much so that managers have been bullish on large-cap growth stocks for more than a year. Add to that a stirring of growth stocks recently – and you have a slam-dunk case.

But wait. There’s that consensus thing. Years of experience in the markets causes our intuitive alarm bells to ring. Perhaps, we fear, the agreement is just too ubiquitous, the argument just too obvious. It just does not happen this way. Markets climb walls of worry, not walls of consensus, don’t they?

So we have to ask: Should we be worried about this virtually unprecedented agreement? Or are the managers perhaps right this time?

In checking with my colleagues, I found a justification for my gut-reaction fears. Comments Russell’s Chief Investment Strategist Ernie Ankrim, “I take no comfort from the consensus at all.”

Even though his own forecast is in line with that of most managers, Ernie points to potential disruptions along the way. The Fed could overshoot and raise rates too high, for example, plunging the country into recession. We could face more natural disasters. Perhaps there’s something out there no one can predict, like the mix-up over the presidential elections in Florida back in 2000 or, of course, the events of 9/11.