This trend has been in place throughout most of 2022 as interest rates have ticked sharply higher.
After a dismal end to the third quarter for investors, markets have staged a nice rebound in October as we get into fall. Investors were treated to better than a two and a half percent gain across all the major indexes on Friday as equities posted another winning week. The Dow (
What is amazing is all this happened amidst a backdrop of poor third quarter earnings report throughout Big Tech. Meta Platform’s META
Yet somehow equities continued their rebound. Certainly, the first positive quarterly GDP report of the year helped market sentiment. More importantly, many ‘value’ stocks continue to post solid results. We saw this last week when both Gilead Sciences GILD
Given this, it is hardly surprising that value stocks continue to outperform growth stocks here in October. This is a trend that has been in place throughout most of 2022 as interest rates have ticked sharply higher. There are reasons for this.
It is easier to place a higher valuation on a concern that has a sky-high P/E that is delivering stellar sales growth when the 10-Year treasury yield is trading at 1.5% than it is when that yield and discounting mechanism gets into 4% territory. Especially with the prospect of the Federal Reserve taking up the Federal Funds rate by another 100 bps to 150 bps before 2022 comes to a close.
Higher interest rates also lead to slower global growth which also undermines the case for owning growth stocks. In this environment, a value stock selling at 10-12 times earnings, with 5% sales growth and a 3% dividend yield is much less likely to disappoint than a growth name seeing 30% revenue growth selling at 60-80 times earnings with no dividend payouts.
In addition, inflation is at its highest levels in more than 40 years. With fast rising interest rates, the country is facing the prospect of its first period of stagflation since the late 70s and early 80s. For investors that are old timers, remember that value stocks far outperformed growth stocks during that period. They are very likely to do so again if that scenario does play out in the quarters ahead.
In summary, until the Federal Reserve is closer to its ‘pivot’ and we see real signs that inflation is ebbing, value names are likely to continue to leave growth names in their rear view mirror. Investors should position themselves accordingly.
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