Bank of America says we’re entering a phase where stocks like these will outperform the market. Here’s why.
A funny thing happened to value stocks in September. After a decade of underperformance, investors started flocking to them on hopes for a U.S.-China trade deal.
But according to Bank of America, value stocks are now cheaper than they’ve been since the financial crisis, creating a buying opportunity.
“Value has never been this cheap vs. Momentum,” wrote Savita Subramanian, the bank’s head of U.S. equity and quantitative strategy, in a note. “Many signals indicate that the recent rotation into Value/out of Momentum could continue.”
The bank says that the only other time in history that value stocks have gotten as cheap as they are now was in 2003 and 2008, when value outperformed momentum stocks by 22% and 69%, respectively, over the following 12 months.
The USA Value Factor iShares Edge MSCI ETF—with top holdings including AT&T (NYSE: T), Citigroup (NYSE: C), and Pfizer (NYSE: PFE)—is up just under 21% so far this year. While the ETF is slightly lagging the S&P 500’s 23% gain, it is outpacing the corresponding momentum ETF, the USA Momentum Factor iShares Edge MSCI ETF, by almost 1%.
In the last week, all three major indexes have surged to new all-time highs as optimism has risen as the U.S. and China inch closer to signing the phase one limited trade deal. Add to that, recent economic data has looked solid with U.S. services activities topping estimates for October, and job creation last month easily beating expectations.
And according to Subramanian, that’s a positive sign for value stocks.
“Some recent signs of stabilization in macro data also supports that the downturn might be bottoming and the Value rotation could continue,” he said.
“The ‘Downturn’ phase in our US Regime Indicator has historically lasted eight months on average (we’re now in month eight),” Subramanian wrote in the note. “The next phase is ‘Early Cycle,’ when Value typically outperforms.”
But Subramanian isn’t the only voice touting value stocks now.
AQR Capital’s Cliff Asness also gave them a stamp of approval this week when he said that it may be time to buy into value stocks after the group has been under pressure for the last decade.
“We think the first eight-plus years of value’s recent 10-year losing streak were ‘rational’ (for want of a better word)… In contract, the last almost two years have seen value lose for ‘irrational’ reasons,” Asness wrote in a blog post. “Value fundamentals have not come in worse over this recent painful period, it’s prices alone that have gone the wrong way.”
“If you believe, as we do, that value is a good long-term strategy, and an important part (not all) of an investment process, we would recommend a modest extra amount of value than the norm,” Asness continued. “To the skeptics we would ask ‘if not now, when?’ If the answer is ‘only when it’s as bad as the tech bubble’ we just think you’re making the wrong call.”
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