A debate is raging about whether we’re in the midst of a major shift, years in the making, from growth stocks to value stocks, now that a COVID-19 vaccine appears to be on the horizon.

Some market participants say the time is now to buy inexpensive stocks exposed to a recovering economy, while others say we’re not there yet and that big technology stocks will continue to lead.

Here’s a good overview on the current range of opinions on whether the “Great Rotation” has actually begun.

Story via Institutional Investor

by Christine Edzelis

Research Affiliates founder Rob Arnott is quick to welcome signs that value stocks may be staging a comeback after underperforming for years.

U.S. value stocks beat their growth counterparts by 8.6 percentage points during the first two days of this week, with the Russell 1000 Value Index outperforming the Russell 1000 Growth Index by 6 percentage points in a single day, according to Arnott.

That’s the highest daily excess return for the value index over the past decade, with the Research Affiliates founder seeing “gaps that large or larger fewer than a half dozen times in the entire history of the Russell indices.”

“When there’s a snapback, it can be huge, it can be fast. Is this value stocks giving us a head fake, or is there a recovery now happening? I think the long-awaited recovery is starting to happen.”

This year value stocks had their worst meltdown in the U.S. since 1931, underperforming growth equities by 41.4 percentage in just over eight months through early September, according to Arnott.

Value stocks are predominantly in areas including financial services, energy, and airlines, according to Arnott.

In his view, trying to predict a catalyst that sparks a turnaround in fortune for value investors is merely “a parlour game,” something that’s fun but unnecessary for successful investing.

A catalyst may never be identified, he said, explaining it may just be gravity that takes soaring growth stocks down, as seen in the bursting of the tech bubble two decades ago.

Still, “it can be profitable if you latch onto a catalyst before the marketplace sees it,” he said, adding that it’s possible the emergence of a Covid-19 vaccine, or the election of Joe Biden as U.S. president, could prove to be catalysts. 

“Anything that points to the Covid-19 crisis ending would have the effect of putting a lid on the number of bankruptcies we’re likely to see in the coming year,” he said. It’s also possible that government stimulus during the pandemic could cause inflation and a rise in rates, benefiting banks.”

As a value manager, I find this kind of environment an odd mix of daunting and exciting,” he said. “When I see value getting hit this hard, I get very excited about what’s coming next.”

Matt Peron, director of research at Janus Henderson, said factor rotations in the stock market are difficult to predict, but the ingredients — including the U.S. elections, news of the Pfizer vaccine and stretched equities valuations — were in place for a rebound in value.

“We were at pretty far extremes that we needed to correct. That’s what we’ve seen, probably faster than what anyone would have thought.”

Rafe Resendes, portfolio manager and co-founder of Applied Finance Capital Management, said tech stocks are “outlandishly” overvalued — but not as much as most people believe relative to value.

As Applied Finance measures it, “growth really started to turn expensive at the end of July, beginning of August. “It’s still not as expensive as it was back during the tech bubble,” of the late 1990s and early 2000s.

The Russell 1000 Value Index fell less than one percent Wednesday, while the Russell 1000 Growth Index jumped almost 2 percent.

Edward Moya, senior market analyst with OANDA, said days when value outperforms are probably more of a blip than a comeback taking root in today’s environment.

Technology stocks will continue benefiting from stay-at-home trends, said Moya, as it will take time before Covid-19 vaccines developed by Pfizer and other drug companies become widely distributed.

“We’re still facing the harsh reality that there’s still going to be at least two, maybe three quarters, of economic pain. That’s going to keep value stocks under check. They’re not going to be able to really, fully take off until we have a widespread availability of a vaccine and we see that the population is taking it.”

In the meantime, stimulus from the Federal Reserve, which is holding its benchmark rate near zero, will probably keep spurring investors into growth stocks, Moya said.

He expects that “heavyweight” technology companies will continue attracting the most interest, “leading the charge higher for equities.”

While investors may see an opportunity to “scale in” to value stocks, they probably won’t “go overblown on value,” he said.

“People are going to want to boost their cyclical exposure, but right now, tech is going to lead the way higher.”

Image source: www.sciencing.com

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