Great value rotation may end as investors re-adopt technology

A trader working on the New York Stock Exchange (NYSE) on May 19, 2021.


Is the high value rotation over?

The S & P 500 is at historically high levels, but investors who have overweighted their portfolios to reopened stocks such as Caterpillar and banks earlier this year and moved away from technology and other growth stocks seem to be rethinking their strategy. is.

Many of the companies involved in “reopening” transactions topped the list in April or early May.

Now, banks, the final stage of so-called “value” trading, are also cracking this week.

Instead, investors have begun to return to old-fashioned growth stocks.

Thursday hit new highs on Cisco, Alphabet and IBM. But perhaps more importantly, speculative growth stocks that were previously very unfavorable, many of which are related to Cathie Wood’s ARK fund and are beginning to rebound.

The story of a changing market

What’s wrong?

The market story is changing. The first-quarter scenario was that the reopening was very strong, bond yields would rise, and inflation could become a problem later this year.

This was only partially correct. The resumption was solid, but as investors came to believe that 1) inflation and supply chain problems could certainly be “temporary” or temporary, as the Federal Reserve claimed. Bond yields have fallen rather than risen. ) Second and third quarters are at the top of earnings and economic growth.

“Value trades have been lifted and growth bulls are prevailing,” said Alec Young, chief investment officer of Tactical Alpha. “Bond yields are a substitute for growth prospects,” he added, adding that bond investors expect inflation to ease and growth to slow (still positive) in the second half of this year.

Result: Investors remain in the market, but are turning to defense (healthcare) and growth (technology). Previously crowded trades such as cyclics and banks related to “value trades” are now retreating.

Why are investors rotating to growth stock when growth is slowing?

“Value is a more economically sensitive sector because it focuses on industry, energy, materials, and small caps,” says Young.

“In the early stages of the business cycle out of recession, it’s a better investment as the leverage of earnings from value stocks increases,” he added.

“The problem is that everything is compressed,” Young said. “We went into recession very quickly, but some of them had all the stimuli, so we quickly got out of recession. Growth stocks now offer more reliable growth. , It is less susceptible to fluctuations in the business cycle. “

In a recent note to the client, Goldman Sachs’ Ben Snyder and David Kostin agreed. “History, valuation, positioning, and economic slowdown are mostly in rotation. [from growth to value] Behind us. “

Since this was a “crowded” (overweight) deal, Goldman suggested that many players were likely to be caught offside. “Mutual funds are significantly overweighting value over any point in their eight-year data history,” they said. “Hedge funds remain leaning towards growth, but that tilt has plummeted recently and is now ranked lowest in more than five years.”

Great value rotation may end as investors re-adopt technology

Source link Great value rotation may end as investors re-adopt technology

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