Fed Delays Value’s Turnaround
Growth stocks have had an unprecedented run of outperformance compared with value stocks for over a decade now. Strong performance has left valuations at extremes, which we used to support our slight preference for value stocks in late 2018 and into 2019. Our economic and interest rate outlooks also pointed to value.
The tide has turned, however.
“The deceleration in economic growth from the U.S.-China trade conflict, the Federal Reserve’s (Fed) pivot to rate cuts, and the collapse in sovereign bond yields may prevent value stocks from reversing growth’s leadership,” said LPL Chief Investment Strategist John Lynch. “When economic and profit growth have slowed and the Fed has eased, historically growth has performed relatively well.”
To illustrate how growth stocks might get a lift from the Fed, we can look at how growth and value stocks performed after the Fed started previous rate-cutting campaigns. As you can see in the LPL Research Chart of the Day, Fed May Delay Transition to Market Leadership, in the absence of recession, growth has performed well relative to value after those initial Fed rate cuts. When those cuts came around recessions (not our expectation this time), growth-value has been a pitched battle. Thank you to our friends at Ned Davis Research for their help with this analysis.
Interest rates may be the most important factor to watch here. The rate-sensitive financials sector is the biggest weight on the value side. A flat or inverted yield curve makes it tough for lenders to generate profit growth. As a result, we have tempered our enthusiasm for the financials sector, despite attractive valuations.
We now recommend similar exposure to growth and value stocks within suitable equity portfolios. We believe value will have its day in the sun at some point. It’s just going to come later than we had anticipated
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