Fed Chair Powell said Tuesday the strong economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned next year. The news helped value pare its intraday decline as short-end bond yields jumped and traders rushed to reverse bets the variant was going to slow the Fed down.
All told, like in 2020, factor swings seem as much about bonds as equities.
“We remain tactically overweight value as our base case is for higher yields next year,” Sanford C. Bernstein strategists led by Sarah McCarthy wrote in a Monday note. “But we recognize that central bank decision making on the correct level of yields in the economy is influenced not only by inflation expectations but also other risks such as the outlook for growth and levels of debt, which could affect the timeline of higher yields.”
The Russell 1000 Value Index has jumped 16% this year in the global risk boom, while strategies deployed by hedge funds that are sector-neutral have held onto their 2021 gains despite the latest virus worries.
But in terms of widely tracked indexes, value’s comeback was still no match for growth’s continued rally as the love for tech names proved enduring. The Russell 1000 Growth Index is up 24% in 2021 so far.
Nonetheless value fans see a good case in the long run for anyone buying at today’s valuations. Using Russell 1000 indexes, the factor is near the cheapest versus growth since at least 2000 whether one is comparing its price to forward earnings, sales or book value.
One reason for this is that value’s profits rose faster than its price in the economic reopening. That means relative to earnings, these shares actually look cheaper. What’s more, in terms of earnings upgrades, value is still beating expensive stocks, Bernstein says.
The worry is that the omicron variant could completely overwhelm the fundamental case for the factor.
“Tough to make a strong case for value until we know more on the virus severity data,” said Dennis DeBusschere, founder of 22V Research.
This article was provided by Bloomberg News.