Hopes are high again for buying low.
Exchange-traded funds that track value stocks, the ones trading cheapest to earnings and book value, have received $5.5 billion of fresh cash in 2016, data compiled by Bloomberg show. The inflows stand out in a market where money is being withdrawn from practically everything else. Growth stocks, enjoying the longest winning streak over value in history, have seen withdrawals of $6.2 billion.
While trying to beat the market with cheap shares has been a lost cause since 2006, the tactic may have found a champion in financial companies, a group whose valuations slid to a 14-year low relative to the rest of the market earlier this year. Banks are getting an extra boost from prospects the Federal Reserve is about to raise interest rates, an action signaling faith in the economy that often boosts their profits.
“We’re really at the very early innings of a new cycle,” said Dan Miller, who helps oversee $28.6 billion as director of equities at GW&K Investment Management in Boston. “Value has done so poorly for so long and it’s under-owned among investors. All we need is for investor interest to pick up a little and that could be enough to sustain the improvement.”
Growth Dominance
Using a formula created by Ned Davis Research that tracks changes in the relative performance between the two styles, growth has been in an uptrend versus value since July 2006, a stretch of dominance that outlasts virtually every other feature in the American stock market. At present, growth’s edge has gone on about three times what it normally has since 1932 and is the longest in history.
Value versus growth is more than just an argument for market theorists -- a preference for value shares could be an indication that investors are preparing for an improving economy, something the stocks have historically needed to thrive. One reason for growth’s hegemony over the last decade has been the ability of those companies to appreciate even when gross domestic product expands slowly.
Banks make up about 30 percent of large-cap value stocks, roughly three times the next biggest industry, energy. As much as anything, it’s been their inability to sustain rallies that has held the style back. Financial companies remain 37 percent below the record highs they reached nine years ago, by far the most of any S&P 500 industry.