After 15 years of underperforming growth stocks, value stocks came roaring back in 2022 amid rising interest rates and a miserable tech rout. Then, they fell behind again this year as investors returned to growth in hopes of lowered interest rates. But as inflation and interest rates stay high, some experts believe that value will cycle back to being on top once again, contends an article in The Wall Street Journal. “The market is too fixated on the Fed stopping its rate hikes,” Amanda Agati of PNC Financial Services Asset Management Group told The Journal, calling the current rally “delusional.”
High interest rates impact growth stocks more negatively than value stocks because they result in their future growth being worse less in today’s dollars. Last year, the Russell 1000 Value Index only dropped 10% compared to the Russell 1000 Growth index, which fell 30%. So far this year, however, the value index has fallen 2% while the growth index has shot up 21%. Value stocks are now 19% under fair value while growth stocks are just 2% below fair value, prompting Dave Sekera of Morningstar to tell The Journal, “Now might be a good time to move out of growth and into value.”
Many stocks in the energy and financial sectors are currently considered value stocks, with the latter thanks to the recent banking crisis that highlighted the mismanagement at a few select banks. But the banking sector as a whole is still robust, and banks are being more cautious about taking risks post-crisis. The Fed is also willing to step in and support regional banks that might be in trouble. Meanwhile, in the energy sector, the war in Ukraine is likely to keep oil prices high, and big oil companies have been reporting strong earnings, the article maintains.
For investors looking to increase their exposure to value stocks, one strategy would be to buy a European index fund, such as the MSCI EAFE index, where 18% of its holdings are financial stocks and 9% is in tech and growth stocks. In contrast, the S&P 500 holds 13% of financial stocks and 26% in tech stocks. And though value stocks also generally have higher dividend yields than growth stocks, analysts caution that a high dividend yield doesn’t necessarily mean a quality value stock; sometimes high yields can be the result of a low share price which could indicate a weak company. Ideally, a portfolio will balance growth and value stocks, since the performance of both has been even for the last 40 years, according to YCharts data that averaged annualized 5-year returns. And while there have been wide disparities in returns between the two over long stretches of time, owning both can smooth out the differences. Investors tend to think they need to have either growth or value, but Michael Sheldon of Hightower RDM Financial Group told The Journal, “You want both. If you tilt too much toward one side of the boat, it creates risk.”