Value Stocks Set To Beat Growth As Rate Hikes Loom

During the 2010s, value stocks performed poorly while growth stocks, as a group, beat the market. However, the tables may finally be turning, and value may outshine growth once more, thanks to rate hikes by the US Fed and other central banks around the world.

Value Stocks Outperforming Growth Stocks

According to Jerfferies’s head of global equity strategy, Chris Wood, investor preferences are switching as central banks get to grips with the highest inflation rates for forty years.

Since mid-November 2021, he says, value has outperformed growth by 16.1 per cent, and that is likely to continue as central banks raise interest rates and credit becomes more scarce.

Currently, money markets are assuming around 150 basis points of Fed tightening, implying interest rates may get as high as 2 per cent over the next 18 months. Bond yield spreads rose by nearly 4 per cent on Friday 18 February, the highest level since December 2020.

FANG Stocks Peaking

According to Wood, it’s looking increasingly clear that FANG stocks are peaking as a percentage of the S & P 500, and that their decline from here on out seems inevitable. Driving this trend is not just the poor performance of beleaguered Meta, but a general rotation away from value into growth.

How decisive the switch will remain to be seen. Value investors have been waiting many years to outperform the market, with the vast majority struggling to do so.

While economic theory and factor analysis suggest that these stocks should outperform the market over the long run, the last decade was an anomaly. However, if we are seeing a return to normality, with value stocks seeing the lion’s share of returns, then traders who buy today could take advantage of the upswing.

How High Will Rates Go?

The pivot from growth to value will depend substantially on how high rates go. Jefferies is predicting that rates will rise by 50 basis points in March, and then go higher from there, depending on the impact of inflation.

Fed officials are indicating that the funds’ rate may go 100 basis points higher by the middle of the summer, a bullish move for anyone holding low-debt companies.