The spread between growth stocks and their value-oriented counterparts, which include companies like banks, financials and energy companies, fluctuated throughout the year, in part due to bets on the market. how quickly the Fed will normalize its monetary policy.
In recent days, signs that the central bank will act faster than expected in the face of soaring consumer prices have slammed shares of growth and tech companies, which have also been disrupted by wider market volatility resulting concerns about the spread of the Omicron https: //www.reuters.com/world/omicron-marches-biden-prepares-us-grim-winter-2021-12-03 variant of the coronavirus.
At the same time, some investors have increased bets on so-called value stocks, expecting them to perform better in an environment of tighter monetary policy. These stocks surged earlier in 2021 when the US economy reopened, but later weakened as investors turned to tech stocks.
“The Fed brings the punch bowl and they’re the ones who take the punch bowl away,” said Michael Antonelli, strategist at Baird. “The markets are rapidly reassessing their vision for the future.”
Fed funds rate futures, which track short-term interest rate expectations on Friday night, reflected about a 50% chance that the Fed would raise rates from its current near-zero level of here May, CME’s Fed Watch tool showed. This against around 31% at the beginning of November.
The bets are prompted by comments from Fed Chairman Jerome Powell, who said earlier this week that the central bank would likely discuss at its next meeting how to accelerate the unwinding of its government bond purchase program. of $ 120 billion per month.
Powell also said the word “transient” was no longer appropriate to describe the current high rate of inflation.
Stronger-than-expected evidence in Friday’s US jobs report reinforced the view of a more hawkish Fed and weighed on growth stocks.
Among the victims was ETF Ark Innovation, which outperformed all other US equity funds last year due to its outsized bets on so-called home stocks. The fund’s shares fell 5.5% on Friday to a 13-month low amid steep declines in several of the stocks it holds.
The Russell 1000 Growth Index is down 2.4% in the first three days of December, while its value-focused counterpart is up nearly 0.9%. The indices are respectively up 21.1% and 16.6% since the start of the year.
“Market insiders are starting to reflect a faster rate hike cycle and it’s the longer-lived growth stocks that are really selling,” said Spenser Lerner, head of multi-asset solutions at Harbor Capital Advisors.
Higher yields – which may result from expectations of a more aggressive Fed policy – may weigh even more on tech and growth stocks at high valuations, as they threaten to erode the value of their cash flows at long term.
At the same time, value stocks and cyclical stocks tend to benefit from a stronger economy, which is often a prerequisite for the Fed to tighten monetary policy.
Lerner is focusing on high-quality, cyclical US large-cap companies that aren’t trading at high valuations and will benefit from what he expects to be a continued strengthening of the dollar as the Fed moves closer to rate hike.
Among the data the Fed will be watching over the coming week will be the release of the Consumer Price Index and core inflation readings next Friday.
Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said that Powell’s openness to accelerating the Fed’s phase-out program will likely lead to more volatility in the coming months as investors position themselves on the Fed. possibility of a rate hike. He is betting that the faster removal of Fed support will increase stocks in energy and financial firms.
Not everyone thinks the Fed is preparing to raise rates in 2022. Burns McKinney, senior portfolio manager at NFJ Investment Group, bets the Fed won’t rush to raise rates after unwinding its bond purchases , but will instead assess how strong the economy is without any monetary support ahead of policy tightening in 2023.
Such a result could see the Fed allow inflation to continue to soar for months on end, strengthening the case for buying cyclical companies like Lockheed Martin Corp and Honeywell International Inc, which are used to buying. ‘increase their dividends and could benefit from Democrat-led infrastructure. agreement which was adopted by Congress in early November.
“If the Fed hadn’t taken out the word ‘transitional’, everyone else had,” McKinney said. (Reporting by David Randall; Additional reporting by Ira Iosebashvili; Editing by Ira Iosebashvili and Sonya Hepinstall)