Value-Growth Gap Widest in 70 Years, Study Says

The pricing gap between growth and value stocks is its widest in 70 years, an AB Bernstein study found, meaning today would be a great time to scoop up the cheapest shares—in anticipation of a reversal of their fortunes.

That time will come at some point, history suggests. And the dynamic of costly stocks getting more expensive and cheap ones getting cheaper is an opportunity to be exploited, the Bernstein study contended. Already this year, value has shown some evidence of a comeback.

“Value as a style tends to perform better than average when there have been extreme troughs in the earnings revisions balance series, particularly 6 to 12 months following the point of most aggressive downgrades,” wrote Bernstein’s Inigo Fraser-Jenkins. Numerous other studies have found that, over the long haul, value investors come out ahead because, once their overlooked gems get attention, the upside is the most lucrative.

There’s an argument that lately growth stocks, as embodied by the famous FAANG tech quintet, have been riding more on momentum than fundamentals. Earning downgrades, in particular regarding growth stocks, are rife these days for 2019’s first quarter. Earnings projections for the S&P 500 are down 6.5% in the year’s first two months, according to FactSet Research.

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“Although we think analyst estimates for 2019 and 2020 globally still have further to fall,” Fraser-Jenkins wrote, “the recent earnings season might have marked a low point in terms of the intensity of downgrades. We show value outperforms after such points.”

When earnings slowed in late 2018, the market suffered, and especially growth stocks. They’ve sprung back thus far this year, but the earnings expansion they feed on doesn’t appear to be there.

To Bernstein, examples of value stocks that have a lot of inherent strength, and thus potential to do well going forward, include General Motors, Bayer, and Credit Suisse. In the firm’s parlance, these stocks are “cheap per unit fundamentals.”

The last time value stocks were on top was from the end of the dot-com bubble at the start of the last decade until the 2008 financial crisis. Then, as the post-crash economy gradually gathered steam and the tech titans commanded the board, growth romped.

But as the old Wall Street adage goes: Trees don’t grow to the sky.

Tags: S&P 500, Stock Market, value stocks

The UK parliament has again defeated Prime Minister Theresa May, deciding on a no-deal Brexit, and the British pound slid some more.

After Tuesday’s debate, marked by an unusual level of booing, the House of Commons voted 391-242 against an agreement. The pound slid a hair more, in keeping with its long descent, down 6% from a year ago.

Dubbed a “polished turd” by MP Steve Double, the question before the lawmakers was another in a series of disappointments for the May government as it tried to negotiate Britain’s departure from the European Union (EU).

Double argued that there had been many attempts to “undermine” May’s negotiations with the EU, resulting in an “impossible situation” between no-deal and a bad one. “The fact that we are where we are today is a failure of our politics and a failure of our leadership.”

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After a series of delays and various divorce proposals, May had hoped that 11^th-hour approvals from the EU on the Irish border’s status would result in a breakthrough. It didn’t.

“I profoundly regret the decision that this house has made tonight,” said May, her voice cracking and hoarse. “This is an issue of grave importance for the future of our country.”

“Quite clearly, ‘no-deal’ has to come off the table,” said Labour Party leader Jeremy Corbyn following the court’s decision, suggesting that “perhaps there should be a General Election” so the people could choose “who their government should be.”

Parliament will reconvene on Wednesday to determine if the UK will leave the EU with no plan on March 29. If the House of Commons again rejects May’s plan, it will then determine a vote on extending Brexit.

“Voting against leaving without a deal and for an extension does not solve the problems that we face,” May said, adding that the EU “will want to know what use we want to make of that extension,” putting the answer on the House.

Andrew Wilson, CEO of Goldman Sachs Asset Management’s Europe, Middle East, and Asia division, told CIO the firm expects the British pound to “weaken further amid prolonged uncertainty,” but a reversal of Tuesday’s vote “could provide some support for the currency.”

He said the central expectation was—and still is— that the UK would eventually split from the EU. ”However, we recognize that the timeline for such an outcome is fluid, particularly given the EU is unlikely to accept either a time limit on the Irish backstop or a unilateral UK exit mechanism from the customs arrangements it enforces,” he said.

Tags: Brexit, EU, Jeremy Corbyn, Steve Double, Theresa May, UK