Almost 10 Years, Gradual Shift to Value Stocks

I have been gauging the stock market allocations performance for the past few weeks, and it seems, with the exception of small-cap growth, value stocks are making their way back into investment fund portfolios. Although badly lagging growth stocks for about a decade, value appears to be creeping back in, slowly, but surely. This is usually a bearish signal for the market, when major investors start shifting their funds over to less risky assets. (BTW, let’s not forget the recent cash infusion into the bond markets). Money flows appear to be going towards energy, financials, and the aerospace & defense industries.

Energy is a given. Many of the equities in this sector have just been beaten down to a pulp due to lower oil prices. People are starting to recognize that the intrinsic values in some of these firms are greater than their current market capitalizations. Additionally, the current decline in oil prices seems to have settled down. The uptick in financials is all based on the results of the pending Stress Tests, in which the results of the Comprehensive Capital Analysis and Review (CCAR) will be released today, after market close. Wall Street is predicting positive results, which will lead to larger dividend payouts and stock buybacks in the very near future. The Aerospace & Defense sector has also been slowly creeping up in the background, perhaps due to the initiation of recent weapons sale programs.

There will always be a battle between value and growth stocks in the market. This phenomenon occurs when investors get fed up with periods of underperformance in value-oriented equities and flee to other higher risk assets. This fund movement usually drives up prices in other assets…usually growth stocks. After growth has reached a certain level, Wall Street institutional investors start to take profits and reallocate their money into “cheaper” assets…usually value stocks, or bonds. Inevitably, unknowing individual investors get burned for chasing performance.

We must remember that the market will invariably change. Whatever was out of favor yesterday could be tomorrow’s winner, and vice versa. Since growth has outpaced value for almost a decade, it’s only a matter of time when money starts shifting back to value. Regardless of what all the pundits and news reports are saying about how things are different now (i.e. — today’s favorite headline: Algorithmic trading will continually drive up growth prices), do not fall for the repeated financial follies of the past.

Of course, this does not mean you should shift all of your money out of growth, and into value. However, a little rebalancing would not hurt. If your time horizon is long, then emerging markets…especially in China…is where most of the growth is. Definitely, have some funds allocated there. However, the current shift into less risky equities in the US is not a very good sign for the stock market.