NEW YORK, June 17 (Reuters) – The Federal Reserve’s restrictive shift is forcing investors to reevaluate the rally in so-called value stocks, which have taken a hit in the past few days after rising for most of the year .
Stocks of banks, energy companies, and other companies, which tend to be sensitive to economic fluctuations, fell after Wednesday’s Federal Reserve meeting when the central bank surprised investors by expecting two quarter-percentage point rate hikes in 2023 on a recent spike of inflation.
The Russell 1000 Value Stock Index (.RLV) is down 4% from its June high, but is still up 13.2% this year. Its growth counterpart (.RLV) has increased by 9.1% since the beginning of the year.
One factor driving this move is the notion that a Fed that is more focused on preventing the economy from overheating may begin to unwind sooner than previously expected. On Friday, St. Louis Federal Reserve President James Bullard said the central bank’s shift was a “natural” response to economic growth and inflation moving faster than expected, which substantiated that view.
“Value stocks have been obsolete, especially in the energy and financial sectors, and the sidelined people are starting to make these trades,” said Jamie Cox, managing partner of Harris Financial Group.
The drop in value after the Fed meeting was accompanied by a fall in some commodity prices, a rise in the dollar and a rally in US Treasuries that pushed benchmark US Treasury bond yields to around 1.44% on Friday afternoon. Continue reading
Investors will be keeping a close eye on next week’s economic data for any clues as to whether the recent surge in inflation – with consumer prices rising as fast as they have been in 12 years over the past month – will continue.
New home sales and mortgage applications are due June 23, while consumer spending is expected in May on June 25.
Investors amassed value stocks in the second half of 2020 as signs of breakthroughs in vaccines for COVID-19 reinforced the case for a strong economic recovery in 2021. Value stocks have outperformed growth stocks by nearly 7 percentage points since early November 2020, contrary to a trend where technology and other growth sectors have consistently outshone value over the past decade.
A reversal of the strong positioning in value stocks could exacerbate the recent price slide. Mutual funds are more overweight stocks than they have been in the past eight years, according to a June 9 report by Goldman Sachs.
Some big-name investors like Cathie Wood, whose ARK Innovation ETF was the top performing U.S. equity fund last year, have hinted that growth stocks will resume their market outperformance if investors in value sectors like energy move up 38.5 % avert. since the beginning of the year. L2N2NQ273 Wood’s flagship ETF is down 4.8% year-to-date.
Others, however, believe the recent wiggle in value stocks is more of a pause than a turning point.
Cyclical companies remain the least overvalued in the US equity market, says Jonathan Golub, chief strategist for US equities at Credit Suisse. High-growth companies trade at valuations nearly double their 10-year averages, while cyclical companies trade at valuations about 40% above their historical values, he wrote in a research note.
The prospect of rising interest rates should also benefit higher-quality stocks, which did better in last year’s downturn but lagged during the rebound, said John Mowrey, chief investment officer of NFJ Investment Group.
He has added to his positions in utility and consumer staples stocks, which have underperformed overall value stocks, and bet that they will increase their dividend payouts, which would make them more attractive even if government bond yields eventually rise.
His holdings include consumer goods companies Church & Dwight Co (CHD.N), which are down 4% year-to-date, and McCormick & Company Inc (MKC.N), which are down 9.7% year-to-date.
“The idea of ââdividend growth was largely pushed aside because we were all enjoying the stock appreciation,” he said. “We believe this will be the next leg of the value stocks rally.”
Reporting by David Randall; Editing by Ira Iosebashvili and Cynthia Osterman
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