If Wall Street is right, the big revival in value investing in the post-lockdown era is in danger of falling apart all thanks to the resurgent bond market.
Strategists from JPMorgan Chase & Co. to Wells Fargo & Co. warn that the best days may now be over for cheap-looking stocks as investors dump the likes of oil producers and banks on the conviction that inflation has peaked.
With traders wagering that an economic slowdown will cool historic price pressures, a long-short value trade has dropped 13% since the mid-June high point in bond yields.
At the same time, companies touted for their above-average potential to expand profits, known as growth stocks, outperformed their value counterparts by the most in 22 years in July, MSCI indexes show, after Big Tech names from Apple Inc. to Amazon.com Inc. rebounded.
And for the first time in two years, a majority of investors polled by Bank of America Corp. in early August said value will trail growth going forward -- just months after the former was favored the most in more than a decade.
“The macro trends are very favorable longer term for the growth style,” said Christopher Harvey, head of equity strategy at Wells Fargo in an interview. “Value typically performs better leaving a recession and into a recovery due to its balance sheet and operating leverage.”
All this skepticism is quite the turnaround for one of the hottest trades on Wall Street in post-lockdown markets -- and defies reams of quantitative research that says the link between rates and value is far from consistent historically.
No wonder systematic investors like Cliff Asness warn those snubbing the investing style in a knee-jerk response to falling yields are getting sucked into a “misleading” theory that there’s a simple -- and direct -- relationship between the two.
For now the skeptics have it, with $3.3 billion flowing out of US exchange-traded funds tracking value stocks in July, according to data compiled by Bloomberg Intelligence. Meanwhile, growth funds have added $5.4 billion in August, after a $3.8 billion haul last month.
“Should one go back into value style? Not yet,” JPMorgan strategists led by Mislav Matejka wrote this week. “The key is the direction of long yields.”
The conventional wisdom holds that value stocks like Exxon Mobil Corp. and Berkshire Hathaway Inc. tend to be more cyclical and offer near-term cash flows, while growth shares like tech are prized for their long-term prospects. Growth stocks are considered larger beneficiaries of falling bond yields because their valuations and expected cash flows are heavily influenced by interest-rate changes.