Does Value Stocks’ July Rebound Mean the Expansion Is About Over?
Historically, value outperformance happens when an economic boom has played out.
Value stocks had a good July. Was that an aberration? Or a portent of a new trend?
Often, a sustained value-stock superiority happens when the economy isn’t roaring, or at least appears to be decelerating. The second quarter’s robust GDP reading is an argument against a near-term slowdown, although worries are mounting that bloated corporate debt or a possible trade war could end the party.
Last month, by the reckoning of S&P Dow Jones Indices Managing Director Jodie Gunzberg, “Value made a comeback.” The large-stock S&P 500 value index was ahead 4.95%, versus its growth counterpart at 3.44%.
The same was true for the mid-cap category, 2.17% to 1.38%. Only with small-caps was growth still ahead, 3.75% to 2.6%, likely due to fear over a trade war—small stocks, whether value or growth, tend to have little international presence.
There have been times in the past decade of recovery where value has led growth, such as during the 2010-2011 European debt crisis, when the market feared another worldwide recession was imminent, and in 2016, as oil prices tanked, giving rise to talk of another slowdown. But these were brief.
The longest ascendancy of value came from 2002 through 2006, according to Wells Fargo. Then, economic expansion was so-so and tech was on its back from the bursting of the internet bubble. Also, the Federal Reserve was raising rates, usually a growth retardant.
Low price-to-earnings ratios, the hallmark of value stocks, make them more affordable, but they also look stodgy when times are good. Tech stocks, which by definition are growth-oriented, have led the current rally. Some of the slowing of the growth category might be owing to recent troubles at a few tech darlings, like Facebook, down lately because of its entanglement with Russian mischief-makers.
For value, defensive sectors like consumer staples, utilities, and telecom are the longtime traditional players. For the most part, all these were nicely ahead last month, with large-cap segments up around 4%, 2%, and 2%, respectively.
Financials, another value segment, had a good July, with the large-cap ones up around 4.5% in stock price: The thinking goes that higher interest rates will benefit financials.
“Although rates didn’t increase,” in July, S&P Dow Jones’ Gunzberg wrote in a report, “the market could be looking ahead to September when there is a chance for an increase” in short-term rates from the Federal Reserve.
The guiding light for value investors is to buy those stocks when out of favor, and take advantage when they turn around. At some point, these investors will have their day.