By Chris Matthews, MarketWatch
The recent outperformance of so-called value stocks relative to momentum and growth has been the talk of U.S. equity markets in September, and many analysts are worried that the sputtering performance of previously market-leading stocks spell trouble for the broader market.
But a recent upswing in global economic data has other strategists believing that value’s outperformance will not continue to come at the expense of momentum and growth stocks, but will be added fuel for the stock market as it reaches for new highs against the backdrop of a revived global economy.
“Market action of late does not appear to be a move from growth to value,” wrote Jim Paulsen, chief investment strategist at Leuthold Group in a research note. “Instead, the last couple weeks seemingly reflect that investors are responding to evidence of yet another cyclical revival in this prolonged global economic recovery.”
Paulsen pointed out that economic surprise indexes, which measure the outperformance or underperformance of economic data have been rising across the globe. Aside from the U.S., “It’s happening in Japan, the Eurozone, Canada, and across the emerging market economies—recently even including a meaningful bounce in China’s Surprise Index,” Paulsen wrote. “Indeed, the Citigroup EM Surprise Index has risen from about -40 in mid-July to -5, led by a similarly big bounce in China from -60 to +5!”
He wrote that coincident easing by central banks around the world, including in the U.S., China and Europe, is now starting to reaccelerate global growth, with the U.S. economy showing particularly strong potential for faster growth in the coming quarters.
The chart below “illustrates the potentially favorable impact that past economic policies may now be having on economic growth,” Paulsen wrote. “It relates the U.S. Economic Surprise Index to a proprietary leading indicator that delivers an objective six-month-forward forecast based on what bond yields and the U.S. dollar have done in the last six months.”
The Leuthold Group
“Massive economic policy stimulus has been dumped on the global economic recovery during the last six to twelve months. With a conventional lag, it is not unreasonable to expect these accommodative policies will help revive the pace of economic growth,” Paulsen argued.
Value stocks are those which have low valuations based on measures like price-to-earnings or price-to-book value. Growth stocks are those that have exhibited faster-than-average growth in revenues, cash flows or profits in recent years, and momentum stocks are those which have seen the greatest price increases of late.
Month to date, the iShares Edge MSCI USA Value Factor ETF /zigman2/quotes/210105323/composite VLUE -2.02% has risen 6.1%, while the iShares Edge MSCI USA Momentum Factor ETF /zigman2/quotes/201303785/composite MTUM -3.05% has lost 0.5%. The Vanguard Growth ETF /zigman2/quotes/209170287/composite VUG -1.40% has risen 1.3%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.60% has risen 2.5%.
Stocks trading at cheap valuations of late include financial firms Bank of America Corp. /zigman2/quotes/200894270/composite BAC -3.68% and Citigroup Inc ., /zigman2/quotes/207741460/composite C -4.45% , as well as consumer discretionary firms General Motors Co . /zigman2/quotes/205226835/composite GM -2.53% and Ford Motor Co . /zigman2/quotes/208911460/composite F -3.98% and energy companies Baker Hughes, a GE Co . and TechnipFMC Plc . /zigman2/quotes/207530935/composite FTI -4.40% .
Value stocks today are concentrated in cyclical sectors, those that tend to do better when the economy is growing quickly and consumers have extra money to spend. That these stocks have been performing better of late could be signaling — along with recent increases in bond yields — investor confidence in future growth.
Brian Belski, investment strategist at BMO Capital Markets, pointed out in a Tuesday note to clients that despite growth stocks being the driver of the majority of stock-market gains in recent years, the market has actually performed better when value stocks have taken the lead, given the degree to which value stocks and cyclical stocks have overlapped.
“For instance, on days when value outperformed, the annualized return for the S&P 500 was nearly 40%! By contrast, on days growth outperformed, the annualized return for the S&P 500 dropped significantly to just 1.2%,” Belski wrote.
BMO Investment Strategy Group
BMO Investment Strategy Group
“This may seem counterintuitive, but the explanation is pretty straightforward – when value has outperformed the returns were significantly above cycle averages,” he added. “Similarly, returns were significantly below average on underperformance days. By contrast, growth returns were much more consistent, whether it outperformed or not.”