The rotation into value could see a big boost in the near term, and looks set to continue to advance further into the longer-term. Here’s why.
There’s been a lot of talk recently about the market’s rotation into value stocks and the group could soon have its moment in the sun.
The IVE S&P 500 Value iShares ETF is up nearly 6% over the last month and 11% so far this year, outpacing the IVW S&P 500 Growth iShares ETF which has risen just 1.9% year-to-date.
What’s more, both the Russell 2000 Value Index—which tracks the smallest and cheapest stocks—and the Russell 1000 Value Index of the largest are beating their Russell growth counterparts by more than 10 percentage points so far this year.
“We still have among the biggest spreads in valuation between value and growth stocks that we’ve ever had,” said Invenomic’s Ali Motamed, whose value-oriented BIVRX Invenomic Fund is the top fund this year in Morningstar’s Long-Short Equity category with a 27% gain year-to-date.
Next Tuesday marks the one year anniversary of the MSCI AC World Value Index’s eight-year low, a timeframe that many quantitative models use to screen for momentum shares to buy. Then May 6 marks the six month anniversary of the relative low for value stocks against their growth and momentum counterparts, with their outperformance beginning after the 2020 election.
“There is a significant overlap emerging between deep value stocks and momentum stocks – there are a number of autos, banks, materials, and energy stocks which are screening as both value and momentum,” Bernstein strategist Sarah McCarthy said in a note this week. “This is the holy grail of quant and value investing.”
After President Joe Biden was elected, his calls for another massive round of stimulus and infrastructure spending sent investors flooding into stocks exposed to the economic reopening and possible rising inflation. Long-overlooked value shares in sectors like financials, energy, and industrials rose higher while the high-flying tech stocks that have dominated the market for the last decade suffered.
And this overlap between value and momentum for some stocks hasn’t been seen since 2016, “the last period of short but meaningful value outperformance,” McCarthy noted. “We are tactically long value and think there is further to go.”
But how much further the rotation into value will go is “unclear,” according to Simpler Trading’s Danielle Shay. Still, Shay says investors are smart to look at value now.
“I will say that for investors, especially long-term investors, of course value is a great place to be in right now,” Shay said. “Due to the overall sector rotation, investors absolutely should be looking at value stocks right now because of the way the market’s behaving.”
But Shay warns against investors testing their luck in the options market.
“There’s just not a lot of meat on the bones,” Shay added. “When you’re trying to trade options in value stocks, they typically don’t have a lot of premium, therefore there’s not a lot of premium to sell if you’re a premium seller. And when you’re looking for momentum moves, there typically aren’t a lot of momentum moves. Yes, they’ve been trending really nicely, but, you know, again, when you’re trying to trade these stocks in the options market, it just makes it really difficult.”