Value stocks are getting crushed again by bad Covid news in a fresh blow to their long-suffering fans in the quant community.
With governments re-introducing restrictions in the face of the omicron variant, the case for buying cheap companies typically tied to the business cycle is faltering on risk aversion and the deteriorating economic outlook.
The MSCI World Value Index underperformed for a fifth straight day on Tuesday, nearing a five-decade low versus its growth counterpart after top executives at Moderna Inc. raised fears that existing vaccines could be less effective against the new strain.
Investors are returning to the standard playbook from the early days of the pandemic: Bidding up growth stocks that have a reputation for increasing earnings irrespective of the twists and turns of the macro cycle.
Think Apple Inc. rather than United Airlines Holdings Inc.
“It’s what can we lean against that’s the safest, and it’s the well-known horsemen of the technology world,” said Art Hogan, chief markets strategist at National Securities. “In that environment, at least this calendar year, value can take a bit of a backseat.”
The question now is whether the fallout from the omicron variant will prolong the value pain. While these shares have rebounded this year on an absolute basis, their underperformance compared to growth equities have pushed them back near the cheapest since the dot-com era. That’s even as they win more earnings upgrades.
The monetary-tightening path signaled by Federal Reserve Chair Jerome Powell could bolster the factor anew, as rising bond yields have typically been a boon for the investing style. But for now, thanks to the deteriorating virus-related newsflow, safety is in and risk is out across a variety of quant trades.
A market-neutral version of the value factor headed for its biggest four-day decline since June, while a strategy that bets on small-caps had its worst four days in four months, Dow Jones indexes show. The quality style favoring steadily profitable shares rose to the highest in a year.
It all continues the story of the last few years when the macro outlook -- rather than corporate fundamentals -- has dominated the performance of value investing. On that score, value fans may get a hand from monetary policy.