Wall Street Week Ahead: Fed shift causes rally in value stocks to wobble
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[June 19, 2021] By
David Randall
NEW YORK (Reuters) - The Federal Reserve's
hawkish shift is forcing investors to reevaluate the rally in so-called
value stocks, which have taken a hit in recent days after ripping higher
for most of the year.
Shares of banks, energy firms and other companies that tend to be
sensitive to the economy’s fluctuations have tumbled following the
Federal Reserve’s meeting on Wednesday, when the central bank surprised
investors by anticipating two quarter-percentage-point rate increases in
2023 amid a recent surge in inflation.
The Russell 1000 Value Stock Index is down 4% from its June peak, though
still up 13.2% this year. Its growth counterpart is up 9.1%
year-to-date.
One factor driving the move is the idea that a Fed more strongly focused
on preventing the economy from overheating may begin unwinding
easy-money policies 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
quicker than expected, bolstering that view.
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“Value stocks had gotten ahead of themselves, particularly in energy and
financials, and the folks that are caught offsides are starting to
unwind those trades,” said Jamie Cox, managing partner at Harris
Financial Group.
The post-Fed meeting slide in value has been accompanied by a retreat in
some commodity prices, a surge in the dollar and a rally in U.S.
government bonds that dragged down yields on the benchmark U.S. Treasury
to around 1.44% on Friday afternoon.
Investors will be keeping a close eye on next week’s economic data for
clues on whether the recent surge in inflation -- which saw consumer
prices accelerate at their fastest pace in 12 years last month -- will
persist.
New home sales and mortgage applications are due out June 23, while May
consumer spending numbers are expected on June 25.
Investors piled into value stocks in the latter half of 2020, as signs
of breakthroughs in vaccines against COVID-19 bolstered the case for a
powerful economic rebound in 2021. Value stocks have outperformed growth
stocks by nearly 7 percentage points since the start of November 2020,
bucking a trend that saw technology and other growth sectors regularly
outshine value over the last decade.
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A Wall Street sign outside the New York Stock Exchange in the
Manhattan borough of New York City, New York, U.S., April 16, 2021.
REUTERS/Carlo Allegri
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An unwinding of the heavy positioning in value shares could exacerbate the
recent slide. Mutual funds are overweight value names to a larger degree than
any time in the last eight years, according to a Goldman Sachs report published
on June 9.
Some big-name investors such as Cathie Wood, whose ARK Innovation ETF was the
top-performing U.S. equity fund last year, have suggested that growth stocks
will resume their market outperformance as investors rotate away from value
sectors such as energy that are up 38.5% since the start of the year.
[L2N2NQ273] Wood’s flagship ETF is down 4.8% year-to-date.
Others, however, believe the recent wobble in value stocks is a pause, rather
than a turning point.
Cyclical companies remain the least over-valued in the U.S. stock market,
according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse. High
sales-growth companies are trading at valuations nearly double their 10-year
averages, while cyclical companies are trading at valuations approximately 40%
more than their historical levels, he wrote in a research note.
The prospect of rising interest rates should also benefit higher quality value
stock names that held up better in last year's downturn but have lagged during
the recovery, said John Mowrey, chief investment officer at NFJ Investment
Group.
He has been increasing his positions in utility and consumer staples stocks that
have underperformed value stocks as a whole, betting that they will increase
their dividend payouts, which would make them more attractive even if Treasury
yields eventually rise.
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Among his holdings are consumer companies Church & Dwight Co, which is down 4%
for the year to date, and McCormick & Company Inc, which is down 9.7% for the
year to date.
"The idea of dividend growth has been largely sidelined because we’ve all been
enjoying stock appreciation," he said. "We think this will be the next leg of
the value stock rally."
(Reporting by David Randall; Editing by Ira Iosebashvili and Cynthia Osterman)
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