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Part 1: Mid Cap Value, the quiet outperformer…Alcoa versus Starwood Hotels

Marc Wiersum, MBA

Series 7-D—The Fed tapers--will mid cap value hold up better then mid cap growth in Q2? (Part 1 of 6)

Unlike large caps, mid caps see value outperforming growth post crisis

This series considers mid cap value versus growth shares and the implications for equity investors. While value tends to outperform growth in the long run, it is important to note that over the past year, investors in the mid cap space, unlike the large cap space, have placed greater value on many mid cap value shares that may have taken an undue drubbing in the 2008 crisis, and are once again receiving enhanced revaluation. The below graph reflects the long-term outperformance of mid cap value versus growth post-1998, which is the norm. This article considers the relative performance of mid cap growth versus mid cap value given the Fed’s shift in monetary policy and the implications for equity investors.

For an overview on the four main risk factors for equity portfolio returns, please see the prior series, The end of QE and the Four Most Important Factors for Your Portfolio.

Growth softens relative to value, post-Fed announcement

As the below graph reflects, the Russell 2000 Growth Index, or IWF, performed much worse than the Russell 2000 Value Index over the course of March—especially after the taper occurred. Despite the market rally in the last trading day in March, value still managed to maintain its lead over growth, and finish the month 3.0% higher than growth.

Higher rates?

Investors are probably worried that a rising rate environment could take to wind out of growth shares with high momentum in the near term, and could be focusing more on value oriented themes should higher rates keep the market from rising much further. In other words, has the bear market in bonds begun, or will deflation contain the bear market in bonds?

To see how mid cap value like Alcoa, AA, is faring versus mid cap growth like Starwood Hotels and Resorts, HOT, is performing, please see the next article.

To see a similar analysis of large cap stocks, please see Will the Fed Take a Bite Out of Apple.

Equity Outlook: constructive macro view

Despite problems in the Ukraine and China, and despite the modest consumption data in the USA, US labor markets appear to be well into recovery—with the exception of the long term unemployed. From this perspective, it would appear that the US is probably the most attractive major investment market at the moment. While the fixed investment environment of the US is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find their way into a new wave of profitable investment opportunities, and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption and investment in the works, the continued out performance of growth stocks over value stocks could remain the prevailing trend, favoring iShares Russell 1000 Growth Index (IWF), and growth oriented companies such as Google, GOOG, or Apple, AAPL.

Equity Outlook: cautious macro view

Given the China and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index, IWM, State Street Global Advisors S&P 500 SPDR and Dow Jones SPDRs—SPY & DIA, and iShares S&P 500, IVV. Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index, IWD, such as Wallmart, WMT.

Continue to Part 2

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