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What's on Your Mind?
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Video: ​What's on Your Mind? Yield Curve, Growth Equities, & AI Jobs​​

Brad Neuman's Photo

Brad Neuman, CFA;

Senior Vice President
Director of Market Strategy

In this episode, Alger Director of Market Strategy addresses questions related to the yield curve inversion, growth being expensive, and job creation.

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In this episode, Alger Director of Market Strategy addresses what the two- and ten-year yield curve inversion mean for growth equities, why wouldn’t someone stick with dividend-paying value equities and short-term fixed income if growth equities seem expensive, and what history tells us about job creation and destruction during industrial revolutions.​

Brad Neuman: Hi. I’m Brad Neuman, director of market strategy, and today I’m answering the top questions submitted on behalf of investment professionals.

This is “What’s on Your Mind.”

First question we have reads, “What does the lasting two- and ten-year yield curve inversion mean for growth equities?”

So, the yield curve. Well, first off what it means is that the bond market is saying that short-term interest rates are not sustainable. They’ll be coming down over time. Now whether they come down simply because inflation is being reduced or real growth is coming down or whether there’s an outright recession is hard to say. But what we think it means is that nominal growth will be decelerating, and we think what that means for equities is that the companies with the most resilient fundamentals could outperform.

So, which are those companies? Well, we believe they’re growth equities, and that’s based on history. History tells us that growth stocks, their fundamentals may be much more resilient to economic downturns than value stocks.

For example, over the past three recessions, growth stock earnings have declined about a third as much as value stocks have. So, in our view, the inverted yield curve is showing signs that growth stocks could outperform value.

Next up we have a submission related to asset allocation. It reads, “I still think growth is expensive, especially with the recent runup in tech stocks. Why wouldn’t I stick with dividend value and short-term fixed income now that I get paid four to five percent?”

Well, first off, while there does appear to be value in the short end of the yield curve, I think it’s important to realize that those four to five percent yields that you’re seeing are somewhat of a mirage, in our view. We think the bond market is saying that those yields won’t stick around for very long. As far as why not stick with dividend value stocks, well, we think those stocks are going to be more cyclical, more impacted by the slowing economy, and growth stocks will be less impacted.

And in terms of valuation, while the yields look pretty fat on the fixed income side, if you actually look at the math of the sustainable fixed income, say a three and a half percent yield on a ten-year Treasury bond, that’s actually lower than the free cashflow yield of the Russell 1000 Growth, which is in excess of four percent, and the Russell 1000 Growth consensus estimates are for 14 percent annual growth over the next several years which, of course, Treasury bonds don’t have. The coupon is fixed. In fact, when we look at the data on valuation, small growth stocks look even cheaper.

In fact, if the historical relationship holds up, the small growth stocks trading at a large discount to the overall stock market when they typically trade at a premium, portend much higher returns, in our view.

And finally, we have a question related to the job market and innovation. This person asks, “Can you explain how, in all industrial revolutions, jobs are replaced with automation but tons more are created, including entire industries?”

Well, to answer that, let’s go with two examples in history, agriculture and transportation.

So back in 1900, we had about 11 million people working on the farms. That was 40 percent of all Americans employed. Today we have less than three million people working on farms, or about two percent of the total employed folks in America. However, we produce five times as many bushels of corn as we did in 1900. How could that be? Well, productivity. Tractors made farms more productive. The genetic engineering of crops led to higher yields.

But what happened to all those folks who were on the farm? Well, they moved to cities. They got more educated. They took jobs in factories, and they joined the industrial manufacturing revolution. Later on, they got even more educated. They got service jobs, and they climbed different rungs of the economic ladder, and that’s the lesson that history teaches us.

Similarly, around 1900 before the advent of the internal combustion engine, there were hundreds of thousands of workers employed as blacksmiths, carriages, harness workers, etc. Today those jobs are basically nonexistent. There’s less than 5,000 folks doing those jobs, but they were replaced by nearly a million auto mechanics, three-plus million professional truck drivers, and now that we’re staring autonomous driving in the face, those jobs could in turn be at risk. And what will replace those workers? Well, we’re already seeing reports of high-paying jobs being offered for those designing prompts for generative AI programs such as GPT-4.

That’s all we have time for, for this episode, but if you have pressing questions, please relay them to your Alger representative and we'll be sure to tackle them in future episodes​. Thanks very much.


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The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of May 2023. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Holdings and sector allocations are subject to change.

Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Local, regional or global events such as environmental or natural disasters, war, terrorism, pandemics, outbreaks of infectious diseases and similar public health threats, recessions, or other events could have a significant impact on investments. A significant portion of assets may be invested in securities of companies in related sectors or industries, and may be similarly affected by economic, political, or market events and conditions and may be more vulnerable to unfavorable sector or industry developments. Investing in companies of small capitalizations involves the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity. Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, political or regulatory event than a more diversified portfolio. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

A yield curve shows the relationship between yields and maturities of Treasury fixed-income securities.

An inverted yield curve occurs when the yields of short-term Treasury fixed-income securities are higher than long-term Treasury fixed-income securities.

Free cash flow is the cash a company generates after taking into consideration cash outflows that suppo​rt its operations and maintain its capital assets.

The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market.

The S&P 600 Growth Index measure the performance of small cap growth equities as determined by sales growth, the ratio of earnings change to price, and momentum. The S&P 600 Value Index measures the performance of small cap value stocks as determined by the ratios of book value, earnings, and sales to price.

The S&P indexes are a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Fred Alger Management, LLC and its affiliates. Copyright 2023 S&P Dow Jones Indices LLC, a subsidiary of S&P Global Inc. and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

The Russell 1000® Growth Index is an unmanaged index designed to measure the performance of the largest 1000 companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. Important Information for US Investors: This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund and ETF shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.

The indices presented are provided for illustrative purposes, reflect the reinvestment of dividends and do not assess fees and expenses that would have the effect of reducing returns. Investors cannot invest directly in any index. The index performance does not represent the returns of any portfolio advised by Fred Alger Management, LLC and actual client results might differ materially than the indices shown. Note that past performance is no guarantee of future results. Comparison to a different index might have materially different results than those shown.

Important Information for US Investors: This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund and ETF shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.

Important Information for UK and EU Investors: This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations). It is for information purposes only and has been prepared and is made available for the benefit investors. This material does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this material and should be satisfied in doing so that there is no breach of local legislation or regulation.

Certain products may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or countries.

Alger Management, Ltd. (company house number 8634056, domiciled at 78 Brook Street, London W1K 5EF, UK) is authorised and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM and/or Weatherbie Capital, LLC, U.S. registered investment advisors, serve as sub-portfolio manager to financial products distributed by Alger Management, Ltd.

Alger Group Holdings, LLC (parent company of FAM and Alger Management, Ltd.), FAM, and Fred Alger & Company, LLC are not an authorized persons for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and this material has not been approved by an authorized person for the purposes of Section 21(2)(b) of the FSMA.

Important information for Investors in Israel: This material is provided in Israel only to investors of the type listed in the first schedule of the Securities Law, 1968 (the "Securities Law") and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995. The Fund units will not be sold to investors who are not of the type listed in the first schedule of the Securities Law.

Fred Alger & Company, LLC 100 Pearl Street, New York, NY 10004 / 800.223.3810 / www.alger.com

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Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. Specifically:

You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.

These additional risks may be even greater in bad or uncertain market conditions.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF confidential, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of this ETF, please refer to the prospectus.

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