Value-Trader Dreams Are Answered in Upside-Down Stock Market
Amid a week of political chaos, a more benign upheaval took hold in the stock market, where frantic shifts in investor positioning reordered winners and losers and breathed more life into a once-faltering strategy.
Helped by the belief Democrats will push aid to the economy, stocks that had been mostly left out of last year’s rally, those trading at lower prices relative to their profits or assets, surged. Energy producers and banks, poster children of the value investing set, each soared at least 8% as a group for the best start to a year in at least a decade.
On the flip side, companies beloved in 2020 for their earnings resilience during the pandemic, including technology, wavered. As a result, value shares in the Russell 1000 outpaced their growth counterparts by 1.7 percentage points, narrowing a gap between the rival categories that last year swelled to the biggest on record.
To be sure, cheap stocks have looked poised to revive multiple times in the past 12 months, only to reverse ground. But their backers have rarely been as enthused as they are now. They cite accelerating distribution of coronavirus vaccines, rising odds for stimulus and a jump in bond yields that signals economic growth ahead. Kevin Caron, a portfolio manager for Washington Crossing who started favoring value in mid-2018, sees prospects for the group improving.
“It’s nice to see that that valuation gap is being recognized by the rest of the market,” Caron said. “There’s potentially a lot of gas in the tank for value to run.”
The market leader-board for the first week of 2021 was last year’s list turned upside-down. Energy shares, the biggest loser in 2020, stormed higher with a 9% surge. Internet and software stocks, darlings of the pandemic era, lagged behind. The Russell 2000 Index of small caps rallied almost 6%, exceeding the Nasdaq 100’s 1.7% gain by the second-widest margin to start a year since 1994.
While value shone in the year’s opening days, it’s not like more speculative and higher-flying areas of the market went dead. Tesla Inc. turned in another extraordinary week, tacking another 25% to a market value that topped $800 billion, while Bitcoin surged and retail investors minted money from call options.
But value is starting to show staying power — this week’s gains extended one of its longest winning streaks in years. Since early November, when encouraging vaccine news prompted investors to reconsider these once-ignored shares, the group has beaten growth in all but two weeks.
It’s validation for investors after a decade in which cheap stocks — while still rising — were left behind by momentum shares. Among exchange-traded funds, a preference for the group is forming. Since the start of the year, investors have added $1.5 billion into ETFs focusing on value stocks while pulling $211 million out of growth funds, data compiled by Bloomberg Intelligence show.
In a December survey from Bank of America Corp., a net 31% of fund managers expected value to outperform growth over the next 12 months, the second-highest reading on record.Hedge funds that make both bullish and bearish equity bets have gone bargain hunting in recent months, with a tilt toward value stocks, according to data compiled by Goldman Sachs Group Inc.’s prime-brokerage unit.
While professional speculators had reason to celebrate the rotation, not every datapoint buttressed their cause. Managers busy on the short side of the market sustained a particularly brutal week, with a Goldman basket of the most popular stocks to bet against rising (as opposed to falling) 10%, the most in seven months.
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To Peter Giacchi, head of designated market making floor trading at Citadel Securities, value may see sustained interest, but not to the complete detriment of growth stocks.
“There’s a new administration and people are looking at the market a little differently. There’s some profit taking, going into small caps, energy, financials. That’s the rotation we’re seeing,” Giacchi said by phone. “I don’t think this is a complete abandonment of growth. Growth is always going to be there thematically, there’s always room for growth in portfolios.”
After quarters of falling profits, an increasingly robust turnaround is predicted this year for the cheap cohort, a group mostly comprising cyclical shares such as banks and industrials. Theirearnings are forecast to surge 26%, exceeding the pace expected for tech and other firms usually seen as faster growers, analyst estimates compiled by Bloomberg Intelligence show.
“Whether that’s banks or beaten-up sectors — you’re starting to see a lot of fundamental drivers that can support them,” said Mike Bailey, director of research at FBB Capital Partners. “Part of it is a return to a better economic cycle. A lot of the value sectors are much more tied to that than tech or some other defensives,” he said. “Could this be a turning point for value? It certainly could be.”
— With assistance by Sarah Ponczek
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