As far as financial market trends go, previously uncool value stocks are quickly becoming the new fad. The turnaround in popularity has come amid recent market declines and increased volatility following what has been a nearly decade long bull market, and the correction is likely far from over. Some strategists are recommending rebalancing portfolios away from growth-oriented stocks towards value-oriented ones, such as those that can be found in the telecom and financial sectors, according to Barron’s.
Current Market Trends
After closing at a high of 2872.87 on Jan. 26, the S&P 500 Index fell almost 8% by Feb. 9, before clawing back to 2732.22 last Friday. That’s a total decline of nearly 4%. Volatility, as measured by the CBOE Volatility Index (VIX), has also shot up, currently sitting about 75% higher than it was since the S&P began its plunge. Investopedia’s own Anxiety Index (IAI), which gauges investor anxiety based on searches for ‘fear-based’ terms of millions of Investopedia readers around the world, has also spiked, rising 10% over the same period.
This shakeout is likely to continue at least over the next few months as market participants try to find a new normal. Keith Lerner, chief market strategist at SunTrust Bank, told CNBC in an interview last week that, “When we’ve seen these sharp declines in the past, the bottoming process typically happens over weeks and months, not days. So investors should be prepared for a lot of back and forth.” (To read more, see: Market Volatility Prompts Massive Swing in VIX Futures.)
The New Cool
Amid the market turmoil and increased investor anxiety, Savita Subramanian, strategist for Bank of America Merrill Lynch, is identifying the newest emerging fad in equity market investments. Based on his quantitative model, the strong growing technology sector has been dethroned, giving way to value-oriented sectors. Telecom, which is going to be one of the largest beneficiaries of corporate tax reform, has taken the top spot, with financials following right behind, according to Barron’s.
However, Subramanian also mentions other high-ranking industries like metals and mining, trading companies, air freight and logistics, multiline and specialty retailers, as well as media. The industries identified by his model as superior opportunities show an annualized return of 11.5% going back to 2005. That’s a good four percentage points higher than the 7.5% return over the same time period of the equal-weighted S&P 500.
To be sure, the new popularity of value stocks is not based simply on irrational investor whims. No, there are some good fundamental reasons for choosing value over growth in a time of overall market uncertainty. Value stocks tend to be larger, much more established companies, which makes them much less risky and volatile than younger companies that are still growing. As established companies, they tend to pay dividends, meaning a relatively secure source of returns even when markets are falling. Value stocks just tend to perform better in bad economic times than their growth counterparts. (To read more, see: Value or Growth Stocks: Which Are Better?)