Is the Value trade over, and what’s happening in Momentum stocks? That’s the question we will address today.
First, a review of what put the topic on investors’ radar screens:
- After underperforming for most of 2019, Value stocks started to work in late August. From the 23rd to September 13th the S&P 500 Value Index rose by 7.7% while Growth only managed a 3.5% advance.
- Momentum stocks (using the MTUM ETF as a proxy) underperformed this rally as well, up 2.1% versus a 5.6% gain for the S&P 500.
- This represented a remarkable reversal of fortune for both Growth and Momentum, which have been 2 productive factors not just in 2019 but for the last several years.
So what’s been happening more recently, and across market cap ranges?
- Since September 23rd (i.e. essentially the last 2 weeks) the S&P is down 2.7% and the Russell 2000 is 4.6% lower.
- S&P 500 Value has underperformed, down 3.7%. S&P 500 Growth has also lagged the 500, down 2.9%, but is beating Value. Yes, both factors can lag over short time periods.
- Momentum names are essentially in line with the S&P 500, down 2.8%.
- Russell 2000 Value is basically tracking the broader small cap index, down 4.5%. Growth is underperforming, down 5.3%.
The upshot: over the last 2 weeks the Value trade has some steam. It has underperformed in large caps and is only treading water in small caps. Momentum stocks are in a no-man’s land, neither outperforming nor lagging.
Now, here’s what’s happening in EAFE (developed non-US) equities:
- Since September 23rd the MSCI EAFE Index is down 2.6%.
- EAFE Growth has performed inline, down 2.6%.
- EAFE Value has lagged, down 3.0%.
The upshot: as with US stocks, the Value trade has faltered in EAFE equities.
So what’s gone wrong with Value? It comes down to the performance of Financials and Technology:
- Financials are 22% of the S&P 500 Value Index and the group is down 4.2% since September 23rd, underperforming the broader market.
- Technology is 26% of S&P 500 Growth, and the group is outperforming Financials and the index, only down 1.6% since the 23rd.
- The MSCI EAFE Index’s largest weight is to Financials at 18%. European Financials are down 3.7% since August 23rd, underperforming EAFE.
While that may seem like an oversimplification, we think it gets to the right conclusion: Value is lagging because investors have lost confidence in a recovery of global economic growth. Our reasoning:
- The whole rotation from Growth to Value started when global sovereign rates bottomed in late August. 10-year Treasury yields bottomed right around 1.5% and went right to 1.9% in 2 weeks. Much of this was due to some positive chatter about US-China trade talks.
- This helped Financial shares, which rose 6% in the first 2 weeks of September. That juiced Value indices.
- Then we started to get bad news on the global economy, and yields started to come in again. 10-Year Treasuries are right back where they were in late August at 1.53% today.
- Lower interest rates help high valuation groups like Technology. Even just since the start of October, with the S&P 500 down 2.2%, Tech is outperforming with a 1.6% decline.
Our bottom line is to remain skeptical that the Value trade will have a next act in 2019. Yes, it could have one more move next week with the upcoming US-China trade talks scheduled for October 10-11. But unless you are very confident of a breakthrough here (and we are not), the storyline for the rest of the year will center on lower interest rates to ward off recession. That’s not a recipe for Value outperformance in our book.