Value stocks could regain position as the new Wall Street favourites, as the global stock market enters the last few months of the year.
Value stocks could regain position as the new Wall Street favourites, as the global stock market enters the last few months of the year. Investors have been siding with growth stocks for the last few months now, buying technology names and tech-heavy industries as concerns about slower economic growth took the centre stage, said Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management. Since the beginning of April, the technology-heavy NASDAQ index has zoomed more than 16% while the Dow Jones has managed to gain only 4% during the same period.
Throughout the summer, investors embraced the ‘growth scare’ story and the ‘lower for longer’ view on interest rates. The Federal Reserve’s restatements of patience around inflation risk rewarded that narrative. To many of us, such positioning resembled the 12-year post-financial-crisis cycle, which was characterized by low economic growth,” Lisa Shalett said. Growth stocks on the S&P 500 have gained more than 20% since the beginning of the second quarter this year. Value stocks, in contrast, are up just 5.9%. However, certain factors are now believed to be favouring value stocks.
Economic revival to favour value, cyclical stocks
Lisa Shalett believes global economic growth will accelerate again as the delta variant concern dies down, bringing about another round of sector rotation that could spur value and cyclical stock outperformance. “Our view rests on the bedrock foundation of the U.S. labour market, which is arguably at its strongest in decades. Unlike the previous cycle, where the job market took nearly 10 years to recover, today’s business cycle dynamics suggest unemployment rates could fall under the pre-pandemic low of 3.5% by December 2022,” she said.
Apart from Morgan Stanley analysts, even Jefferies’ Global Equity Strategist, Chris Wood is eyeing a rotation into cyclical stocks. “If the Delta variant has undoubtedly caused a setback for the cyclical trade this quarter, resulting in renewed outperformance by Big Tech stocks, a renewed rotation into cyclical stocks should kick in once it becomes clear that the Delta wave has peaked in the absence, of course, of the emergence of another more lethal variant,” he wrote.
Lisa Shalett further added that the resilience of the US labour market presages higher consumer confidence and spending. “This could help sustain economic growth and an upward bias to interest rates. Meaning, equities that are closely linked to economic growth look well-positioned, while richly valued mega-capitalization tech leaders remain vulnerable to a pullback due to higher rates that would pressure their stock price-to-earnings multiples,” she said.
For investors looking to prepare for such a rotation of market leadership on Wall Street, should consider taking some of their profits in passive indices, especially tech-heavy exposures, and adding diversification through cyclical sectors, with an eye toward quality. Financials remain top picks for Morgan Stanley.