Rotation to Value Here to Stay as Fed Desperate to Vanquish Inflation Boogeyman

Investing.com – The rotation to value from growth stocks has staying power as the sector can count on a powerful ally: A Federal Reserve desperate to rein in inflation.

The Invesco S&P 500 Pure Value exchange-traded fund has racked up gains of about 7% this year, while S&P 500 Growth Index is down about 5% year to date fuelled by bets a rising interest rate environment will hurt sectors of the market with longer-term cash flow horizons like tech, or growth stocks.

Unlike previous rotations to value, which just last year proved to be fleeting, the current rotation has staying power as the Fed’s “narrative has changed dramatically,” Johan Grahn, Head of ETF Strategy at Allianz told Investing.com in an interview earlier this week.

In the space of a few months, the Fed has moved on from “not even thinking about thinking about raising rates,” ditched “transitory” from its inflation vocabulary, and laid out the red carpet for policy normalization.

“Last year, the Fed was talking about potentially taking a little action in 2022, but it was really thinking about only doing something in 2023. But now the Fed is signalling that we’re going to do everything we can as soon as we can,” Grahn added.

“The rotation into value is more likely to stick around than it was last year, based on what the Fed is signalling and what we’re seeing in the bond market,” he added.

Hot debate has broken out on Wall Street about what exactly the new normal for the Fed will look like. A rate hike in March followed by several more hikes to take the Fed funds terminal rate to 2.5% by 2024? The start of quantitative tightening, or a balance sheet runoff starting in July?

While the guessing game on “normal” will continue for some time, there is no doubt that the Fed is having to play catch up, and may have to move faster on policy tightening as its tools are blunt to combat supply-driven inflation.

“Inflation is going to be hanging over our heads for a longer period of time and I think that the Fed is going to have no choice but to continue to move their rates up,” according to Grahn. “I happen to believe that they might move in a faster pace.”

“The consensus now is for rate hikes of about 25 basis points per quarter, but at some point, I wouldn’t be surprised if they said we’re going to hike by 50 basis points … that will trigger a quick rotation in value again.”

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