Stocks like Apple and Tesla are again leading the market, raising questions about whether a short reprieve for shares of companies closely linked to the economy—overlooked for close to a decade—may already be over. But the market’s latest moves may indicate only a pause, rather than a reversal in value’s comeback.
Value stocks, or those that typically trade at a low multiples versus their cash flow or other metrics, had started to perk up late last year. News of a vaccine for Covid-19 raised hope for a strong global recovery and bolstered the outlooks for financials, manufacturers, energy, and other commodity-oriented companies.
But a recent decline in interest rates and inflation expectations has led to another reversal. TheiShares S&P 500 ValueETF (ticker: IVE) has gained 3.7% in the past month while theiShares S&P 500 GrowthETF (IVW) is up 7.7%. In a note to clients on Tuesday, Nicholas Colas, co-founder of DataTrek Research, attributed growth’s recent outperformance to five companies:Apple(AAPL);Microsoft(MSFT);Amazon.com(AMZN); Google’s owner, Alphabet (GOOG); andTesla(TSLA).
“A sudden rotation into brand-name growth stocks isn’t typically a good sign for markets over the near term,” Colas wrote. Investors took cover in big-cap tech stocks as markets swooned last year, and the fact that money has been flowing back into them lately could suggest people are hitting pause on their reopening plays, before adding to their holdings of more cyclical stocks. Investors may be waiting to see more proof that the recovery will come through, he said.
Morgan Stanley Wealth Management’sLisa Shalett is also skeptical of the recent resurgence in growth stocks and the likelihood that the economic rebound this cycle will be narrow, forcing the Federal Reserve to keep interest rates ultralow. Low rates tend to benefit growth stocks more than value.
In a note to clients, Shalett said she expects growth this business cycle to be much broader and stronger than in the past one, with credit growth likely to resume. Instead of monetary policy, fiscal policy, whether through infrastructure spending or other stimulus measures, will loom large over the market—potentially contributing to higher inflation.
Inflation could bring higher interest rates, benefiting banks. Commodity producers would gain as well.
As a result, she recommends investors tilt toward cyclical stocks, foreign, value, and quality factors.
Indeed, people putting money into passive investment funds still seem to prefer value. As of last week, value exchange-traded funds had recorded 12 consecutive weeks of net inflows, while growth ETFs saw the biggest outflows in six weeks, according to equity and quantitative strategists atBank of America.
The BofA strategists see more room for value to recover, based on signs they track. For example, value has only outperformed growth by about 20% versus 60% on average, and its outperformance is only in its seventh month, while periods when value beats growth average 33 months. Profit growth also has yet to peak, and money managers are still light on value-oriented stocks, with active funds roughly 30% underweight value.
Abhay Deshpande, a veteran value manager and chief investment officer at Centerstone Investors, is fully invested even though markets look expensive.
Many of the opportunities Centerstone has found are popping up in small to midsize companies abroad, including in smaller emerging markets that have been ignored as investors have flocked to big technology stocks and large markets like China. One area Desphande finds attractive: travel and casino companies in emerging Asia as vaccine distribution picks up and a global recovery takes hold.
Larry Pitkowsky, manager of theGoodHaven(GOODX) fund, also thinks markets are pricey, but he is finding the quality value stocks he tends to favor amid financials. The market hasn’t fully priced in the benefit to financial companies as interest rates rise, Pitkowsky believes, so he is adding to his holdings of stocks likeProgressive(PGR). The insurer offers a high return on capital, growing revenue, and a strong management, but the stock is trading relatively cheaply, at multiples in the midteens, he said.