When interest rates start to edge lower, investors typically become bullish on stocks. This is certainly the case as markets anticipate the start of the Fed’s easing cycle, which kicked off with last month’s sharp rate cut. The S&P 500 stock index is up about 24% year to date and 40% over the past 12 months. It is widely believed that lower borrowing costs benefit so-called growth stocks because they are often capital-intensive. Technology and small-cap stocks are often classified as growth stocks and are expected to rise faster than the rest of the market. However, there are other factors now at play, and some now believe that value stocks, often considered undervalued, can outperform in the current environment. Investors were asked which they preferred: value or growth stocks. Economic Risks Adam Turnquist, chief technical strategist at LPL Financial, said that in the current economic context, he expects value stocks to outperform growth stocks as risks of economic contraction begin to decline. “History also suggests that value stocks should outperform growth stocks, at least in the six months after the first rate cut,” he said. However, he said that if economic conditions hit a “hard landing,” growth stocks Likely to outperform. “Most growth indexes have a strong emphasis on large-cap and quality factors,” Turnquist said. “Most of these companies have impressive earnings growth, low leverage, generate substantial free cash flow, are solid However, their balance sheets and wide moats make them potential safe havens in uncertain times and/or when growth becomes scarce, said Savita Subramanian, head of U.S. equities and strategy at BofA Securities. Subramanian urged investors to “stick to value.” “The Fed is cutting interest rates as the profit cycle accelerates – that’s unusual. As you know, the Fed typically cuts rates in response to a slowing economy, slowing profits environment. This is different,” she told CNBC’s “Closing Bell” program last month. “We do see (value) starting to come into play and we see earnings expanding in tandem. I think … all cylinders are firing for a nice long-term value cycle.” Historic Outperformance Greenwich Wealth Vahan Janjigian, chief investment officer at Greenwich Wealth Management, has been a fan of value stocks for some time and has a large portion of his portfolio in value stocks. He said that value stocks have consistently outperformed growth stocks over the long term, although he acknowledged that this has not happened in the past 15 years or so due to the “unprecedented” zero interest rate regime. “Now, despite another rate cut from the Fed, the more important question is what will the yield curve do? If the yield curve normalizes (i.e. becomes more upward sloping), value stocks should outperform growth stocks,” he said. Janjigian said that if interest rates and the yield curve normalize, he expects stock performance to normalize as well. “That means this long-term period of growth exceeding value should be over,” he said. So far this year, the Vanguard Russell 1000 Value Index Fund ETF is up about 16%, while the Vanguard Growth Index Fund ETF is up about 22%. VTV VUG 1Y mountain Value vs. Growth ETFs In a report last month, Barclays’ U.S. Equity Strategy noted that value stocks do tend to outperform growth stocks after rate cuts, although this is not always the case. As one. Analysts led by Venu Krishna wrote: “In past non-recession rate cut cycles, median value returns have exceeded growth returns after the ‘first’ rate cut… but inconsistently Three months from now, “growth performance will be dominant and more stable, meaning there may be more room for growth in the future if we are on track for a soft landing,” they added. George Ball, chairman of risk/reward investment firm Sanders Morris, is another team value markets expert. “Stocks with lower P/E ratios have greater upside and lower risk for the foreseeable future than higher-priced ‘glamour growth’ stocks,” Ball said. “In a period of falling interest rates, value industries are a good bet. A double-edged sword: better yield potential and less downside risk. For Barclays’ Krishna, however, while both investment styles could benefit from falling interest rates, “the economic Growth stocks could have more upside in the event of a recession, though he did acknowledge there are some risks to his thesis, including the upcoming U.S. presidential election and greater upside in S&P 500 returns. have historically been good for value.”
Which one will perform well amid lower interest rates, pros predict | Real Time Headlines
RELATED ARTICLES