(Bloomberg Opinion) -- Value stocks have lagged behind the broader market for so long that more than a few of Wall Street’s best and brightest declared that investing in companies whose shares are trading at a deep discount despite stable and predictable earnings made no sense. That just shows why it often pays to tune out the countless talking heads opining on markets.
The S&P 500 Value Index is on a tear, setting a record this week. The benchmark is now up 21.1% for the year, topping the 19.6% gain for the S&P 500 Growth Index, which tracks shares of companies trading at a premium and have the potential for faster earnings growth. Those who scrutinize past trading patterns to predict future results are especially encouraged that the value gauge has broken out of the top end of the trading range that it has been stuck in since early 2018. To them, this is a clear bullish signal — and not just for value stocks. “Technicals not only remain positive for the group, but cross-market correlations and relationships with macro data suggest the price action points to an improved outlook for broader risk markets,” the strategists at JPMorgan Chase & Co. wrote in a report Wednesday. To them, what’s really exciting about this move higher is that it’s being led by financials, the largest sector weighting in the value index. On a fundamental basis, higher share prices for banks, brokers, insurers and similar companies is a good sign that investors are betting the economy may be able to avoid a recession that many economist forecast may hit next year.
That’s the view of the optimists. The pessimists would say it only makes sense to shift into value shares with a recession looming because the earnings of those companies would be less likely to suffer. The strategists at Cantor Fitzgerald noted this week that in recent years the shift from growth to value has tended to precede weakness in the S&P 500 Index, like what happened at the end of 2018 and earlier that year.
BOND TRADERS SHUN OBVIOUS HEDGESome Federal Reserve officials are still forecasting higher interest rates in the next 24 months, according to the central bank’s latest “dot plot” of projections released on Sept. 18. Even so, the bond market isn’t worried, judging by demand at the Treasury Department’s monthly auction Wednesday of $20 billion in two-year notes with rates that float higher or lower with benchmarks. Investors bid for just 2.58 times the amount of securities offered, the lowest so-called bid-to-cover ratio since the government began offering the notes in January 2014. The Fed meets next week to set rates, and the market is expecting policy makers to cut their target for overnight loans between banks for the third time since July to a range of 1.50% to 1.75%. And it’s not as if they have been overly dovish of late. Positive comments from the U.S. and China on their trade talks and progress on the U.K.’s efforts to leave the European Union have alleviated some pressure on the global economy. If Fed Chairman Jerome Powell attempts to frame any rate cut next week “as the final act of accommodation before rates go back on hold, there could be limited room” for bonds to rally, the top-ranked rates strategists at BMO Capital Markets wrote in a research note Wednesday.
BRIDLED OPTIMISMPresident Donald Trump said Wednesday that he is lifting recently imposed sanctions against Turkey after the country complied with a cease-fire agreement with Kurdish forces in Syria. That, naturally, gave the Turkish lira a boost; it rose as much as 1.43% in its biggest gain since Sept. 12. Even so, the gains only brought the lira back to where it was a little more than two weeks ago, suggesting traders still see a lot of downside in holding what may be today’s riskiest currency. The lira is down 4.92% in 2019, poised for its seventh consecutive losing year, having depreciated about 63% since 2012. Economists surveyed by Bloomberg forecast that Turkey’s economy will contract next year. Just last week, official data showed industrial output fell for a 12th consecutive month in August, extending the longest streak of declines since the global financial crisis in 2009. Conditions are so dire that Turkish central bank officials discussed an “accounting tweak” that could boost a dividend payment to the government and help cover a budget deficit, Bloomberg News reported Tuesday, citing a person familiar with the matter. Under that scenario, going long the lira is not for the faint of heart.
PIGS ARE HOPPINGThe most fascinating part of the commodities market these days may be the one for hogs. It’s not about prices, which have been stuck in a tight range since early August. Rather, all the action is on the supply side. Bloomberg News reports that China’s large-scale hog farms that survived the African swine fever outbreak are expanding their herds, which should drive a recovery in sow numbers as early as next year. The virus, which kills most pigs in two weeks but isn’t known to harm humans, has slashed China’s swine herd by half since it was first reported in August last year, according to Rabobank. That’s led to a huge shortfall in pork supplies. China’s pork purchases from overseas jumped more than 70% in September from a year earlier. In the U.S., more than 40 million pounds (18,000 metric tons) of pork bellies, the cut used for making bacon, were sitting in refrigerated warehouses as of Sept. 30, Bloomberg News reported, citing U.S. government data released Tuesday. That’s the most for the month since 1971. U.S. hog producers started building up their herds in anticipation of more demand for meat imports from China, but that’s mostly led to an excess of supplies in the U.S.
IT’S NOT WORKINGAfter saying the nation was “at war” with itself and condemning protesters, President Sebastian Pinera of Chile has softened his tone and pledged the government would seek dialogue and work on social measures. So far, that’s failing to settle markets. Chile’s benchmark stock index tumbled 4.61% on Monday, recovered a bit on Tuesday by rising 0.80% only to resume its decline Wednesday by dropping 1.65%. Workers on Wednesday proceeded with planned strikes and demonstrations, with at least three facilities owned by state copper producer Codelco disrupted as unions encourage members to join anti-government protests that have swept Chile for the past five days, according to Bloomberg News. Demonstrations are going ahead even after Pinera asked for forgiveness for the failure of successive governments to adequately address inequalities. Pinera has pledged to raise the maximum income tax rate to 40% from 35%, lift basic pensions by 20% and introduce a guaranteed minimum income. The problem is that the concessions threaten the government’s previous economic agenda, which included allowing shareholders to offset corporate taxes against personal payments and a bill to boost pensions by bolstering the existing system of individual savings accounts. Protesters are demanding a return to a publicly run retirement system. It’s no wonder the strategists at JPMorgan this week slashed the country’s equities to “underweight” from “neutral.”
TEA LEAVESMario Draghi will preside over his final monetary policy meeting as head of the European Central Bank on Thursday before handing the reins to Christine Lagarde. He will always be remembered for keeping the euro from breaking apart by saying during the height of the region’s debt crisis that the ECB would do “whatever it takes” to preserve the currency union. In that sense, his legacy will be seen as successful, especially because it enriched investors. The euro has appreciated about 5.70% against a basket of developed-market peers tracked by Bloomberg since he became president of the ECB in November 2011. That’s second only to the Swiss franc’s 19% surge and the dollar’s 30% gain. The Bloomberg Barclays Euro Aggregate Index of bonds has soared 47%, far better than the 15% gain in the Bloomberg Barclays Global Aggregate Index. The one laggard — if it can be really seen as such given the euro almost collapsed— has been the equities market, with the STOXX Europe 600 Index gaining about 66%, compared with 76% for the MSCI All-Country World Index. But as good as Draghi has been for financial markets, his legacy in terms of the actual economy won’t be viewed as favorably. The IMF said last week that it expects the euro zone economy to expand just 1.2% this year, compared with 1.7% on average for advanced economies.
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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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