As growth stocks falter, value investments and related exchange traded funds are beginning to pick up the slack, and the momentum trade-off could continue, according to Morgan Stanley.
Value stocks have significantly outperformed growth offerings since the beginning of March, reports Steven Russolillo for the Wall Street Journal.
In March, large-cap value stocks in the Russell 1000 Value Index have gained 2.2%, whereas the Russell 1000 Growth Index dipped 1.1%. Year-to-date, the value index is flat, compared to the 2.9% decline in the growth index.
“We determined that rotations this strong, while infrequent, are typically followed by periods where value outperforms,” Morgan Stanley strategist Adam Parker said in a note. “This has been the case even in those value rallies, such as the current one, that occurred without fundamental news favoring value stocks.”
Parker pointed out that energy and consumer-staples typically lead in this type of trading environment while tech and telecom sectors fall behind. Parker also noted that Morgan Stanley has trimmed its tech exposure.
The Energy Select Sector SPDR (XLE) has gained 2.0% and Consumer Staples Select Sector SPDR (XLP) rose 0.7% over the past month. Meanwhile, the iShares U.S. Technology ETF (IYW) has declined 3.4% over the past month. [Signs of the Times: New Highs for These ETFs Say a Lot]
However, Parker warns that the markets, while still generating positive returns, will be strengthening at a slower pace.
“Following a strong value rally, on average, the market underperforms its historical average for the next 10 months,” Parker said. “That is not to say that the market necessarily declines, but instead on average it rises less than normal for the next 10 months. After that, market performance tends to return to historical norms.”
Looking ahead, value could continue to outpace growth stocks for a while. [Value ETFs May be the New Black]
“Value tends to continue its advantage over growth following strong value rallies,” Parker added. “The value outperformance continues for 11 months following the value rally…Thus, the expectation that many investors we talked to last week have of a growth rebound following a run-up in value stocks is not borne out by history.”
Along with picking out value sectors, investors can track broad index ETFs that specifically target value picks. For instance, the iShares Russell Top 200 Value ETF (IWX) tracks companies with relatively low price-to-book ratios and lower forecasted growth from the Russell Top 200 Index, which includes the largest capitalization sector of U.S. equities. Additionally, the Vanguard Mega Cap Value ETF (MGV) follows the CRSP US Mega Cap Value Index, which also tracks mega-capitalization stocks with a value tilt. [Very Valuable Value ETFs]
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- Morgan Stanley
- Value stocks