Wall St Week Ahead: Fed Change Stirs Value Equity Rally
NEW YORK, June 17 (Reuters) – The Federal Reserve’s hawkish turn is forcing investors to reassess the rally in so-called value stocks, which have taken a hit in recent days after climbing higher for most of the year. year.
Shares of banks, energy companies and other companies that tend to be sensitive to fluctuations in the economy fell in the wake of the Federal Reserve 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 (.RLV) is down 4% from its June high, but still up 13.2% this year. Its growth counterpart (.RLV) is up 9.1% since the start of the year.
One of the factors behind this move is the idea that a Fed more focused on preventing the overheating of the economy could start canceling easy money policies sooner than expected. St. Louis Federal Reserve Chairman James Bullard on Friday said the central bank change was a “natural” response to faster-than-expected economic growth and inflation, reinforcing this view .
“Value stocks had gotten ahead, especially in the energy and financial sectors, and the people who are caught out are starting to unwind these deals,” said Jamie Cox, managing partner at Harris Financial Group.
The decline in value after the Fed meeting was accompanied by a decline in the prices of some commodities, a rise in the dollar and a rally in US government bonds which pushed down yields of the US Treasury benchmark at around 1.44% Friday afternoon. Read more
Investors will be keeping a close eye on next week’s economic data to see if the recent spike 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 June 23, while May consumer spending figures are due June 25.
Investors crowded into value stocks in the second half of 2020, as signs of breakthroughs in COVID-19 vaccines reinforced the case for a strong economic rebound in 2021. Value stocks outperformed stocks growing by nearly 7 percentage points since early November 2020, countering a trend that has seen technology and other growth sectors steadily eclipse value over the past decade.
An unwinding of the strong positioning in value stocks could worsen the recent decline. Mutual funds are more overweighted than ever in the past eight years, according to a Goldman Sachs report released on June 9.
Some high profile investors such as Cathie Wood, for whom ARK Innovation ETF was the best performing US equity fund last year, suggested that growth stocks would regain their market outperformance as investors shy away from value sectors. such as energy which are up 38.5%. since the beginning of the year. L2N2NQ273 Wood’s flagship ETF is down 4.8% year-to-date.
Others, however, believe that the recent swing in value stocks is a pause rather than a turning point.
Cyclical companies remain the least overvalued in the US stock market, according to Jonathan Golub, chief US equity strategist at Credit Suisse. High sales growth companies are trading at valuations close to double their 10-year averages, while cyclical companies are trading at valuations about 40% above their historical levels, he wrote in a note. of research.
The prospect of higher interest rates should also benefit higher quality, value stocks that have weathered last year’s downturn better but lagged during the recovery, said John Mowrey, chief investment officer at NFJ Investment Group.
He increased his positions in utility and consumer staples stocks which have underperformed value stocks as a whole, betting they will increase their dividend payouts, which would make them more attractive even if the returns. of the Treasury eventually increased.
Among its holdings are consumer companies Church & Dwight Co (CHD.N), which is down 4% for the year to date, and McCormick & Company Inc (MKC.N), which is down 9 , 7% for the year to date.
“The idea of dividend growth has been largely dismissed because we have all benefited from an appreciation in stocks,” he said. “We believe this will be the next step in the rally in value stocks.”
Reporting by David Randall; Editing by Ira Iosebashvili and Cynthia Osterman
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