Gyrations in the Treasury curve are playing a role. Value stocks like banks tend to be more cyclical and dependent on near-term cash flows, whereas growth stocks like Facebook Inc. are pricey because of their promise of long-term profit expansion. Because of this, a steeper yield curve tends to bode well for stocks that look cheap relative to fundamental metrics like corporate earnings.
“Equities have moved from the ‘non-linear’ world of distressed debt investing to the more ‘linear world’ of earnings revisions, sales growth and valuations,” Jefferies strategists led by Sean Darby wrote in a Wednesday note before the Fed meeting. “From the nadir of the steepening of the U.S. yield curve, the market has rewarded more value-orientated sectors.”
Yet after the U.S. central bank policy decision, key segments of the Treasury yield curve flattened, a move signaling economic pessimism that flashes bad news for riskier investing strategies.
Still, the relationship between macro trends and factor returns is hotly contested among quants. Many argue that bond moves should never affect factor allocation while the sharp discount in value stocks is reason enough to be bullish.
Unprecedented fiscal and monetary stimulus could potentially deliver all manner of bullish surprises in the months ahead, says Aberdeen Standard’s Phayre. That’s why the quant is sticking with the value in his multi-factor model.
“When it does rally, it rallies so hard and so fast that if you’re not in it, you’ll have missed it pretty quickly and that can be quite painful,” he said.
This article was provided by Bloomberg News.