Value Stocks’ Fate May Hinge on Pinpointing Bull Market’s Age


When it comes to their outlooks for cheaply-valued stocks, strategists Marko Kolanovic and Ed Clissold couldn’t be further apart. But there’s one area where they see eye to eye: Bargain hunting success is tied to the market cycle.

Value stocks, now dominated by economically sensitive shares that have outperformed during the rebound from the pandemic recession, just had their worst month relative to their growth counterparts in two decades. To Kolanovic, JPMorgan Chase & Co.’s chief global market strategist, it’s a pause in a rally that’s set to resume amid a continuing recovery.

Clissold, Ned Davis Research’s chief U.S. strategist, however, advises investors to cut holdings in value stocks, saying the bull market is maturing and it’s time to play safe by moving toward stable growers.

Value Stocks’ Fate May Hinge on Pinpointing Bull Market’s Age

While investors dumbfounded by the sudden rotation out of value are getting little clarity from Wall Street prognosticators, the clash does highlight a bigger question behind the debate about the growth versus value trade: where the bull market is in the cycle.

For clues, one can look to the earnings trajectory as banks unofficially kick off the reporting season this week. With profit from all companies in the S&P 500 Index forecast to surge more than 60%, the second quarter likely marks the peak of the expansion cycle. Meanwhile, upward revisions for growth stocks outpaced value for the first time since January, data compiled by RBC Capital Markets show.

“What is clear is that the cyclical/value trade is entering 2Q21 reporting season a bit wounded,” said Lori Calvasina, head of U.S. equity strategy at RBC. “This isn’t just a statement on recent performance woes. We also see this in earnings revisions.”

Value is losing some luster as a drop in Treasury yields combined with the fast spread of a coronavirus variant has prompted investors to rethink the reflation trade. The Russell 1000 value index is poised to trail the growth gauge for a second month after posting its worst relative performance since 2001 in June.

The growth scare is misplaced, according to Kolanovic, who predicts the global economy will surge in the second half as lagging nations join the U.S. in “a more synchronized growth boom.”

“It is far too early to fade reopening/reflation trends,” Kolanovic wrote in a note to clients Monday. “We are in the early stages of the post-pandemic recovery (the world hasn’t reopened yet) not late-cycle.”

But Ned Davis Research’s market cycle model points to a weak second half. Moreover, from euphoric sentiment to weakening market breadth and a drop in transportation stocks, signs of a maturing bull are building.

“Recent transports weakness could be reflecting the inevitable slowdown in economic growth in the second half and/or higher input costs from the six-year high in crude oil,” Clissold wrote in a note earlier this month. “Regardless, it reflects the likelihood that the macroeconomic backdrop, while still broadly positive for stocks, is not as one-sided as it has been.”

Value Stocks’ Fate May Hinge on Pinpointing Bull Market’s Age

Exchange-traded fund investors are taking notice. They’ve pulled more than $1 billion out of value-focused ETFs this month while adding money to growth, a reversal from all of the previous 14 months, when value attracted more money, data compiled by Bloomberg Intelligence show.

Dariush Aryeh, chief investment officer of Geneva-based Fundana SA’s fund of funds, says his firm is betting on growth stocks.

“Growth looked like a bad story over the last six months, and at the same time many of these companies have increased market share and earnings,” Aryeh said. “We’re starting to position ourselves for an explosive return of stock-picking of growth stocks and a selloff of reopening stocks.”

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