Size of the text
Sheets of copper cathode
Bloomberg/Bartek Sadowski
In the stock market, the changing of the guard might last for years. Since Sept. 23, when markets appeared to become more confident about the U.S. economy recovering swiftly from the Covid-19 outbreak, value stocks have outperformed growth equities, which are more vulnerable to changes in the economy than growth stocks.
Covid-inspired reopenings
The need for 19 immunizations has already been met, thanks to trillions of dollars in fiscal stimulus. Since the inflection point in late September, the
Russell 1000 Value Index is a stock market index that measures the value of
has increased by roughly 31%, more than twice its previous gain.
Russell 1000 Growth Index is a stock market index that measures how well a company
However, the trend could still be in its infancy. In 2016, the value index surpassed the growth index, but from the end of that year and September 2020, it underperformed significantly. According to a chart from Stifel strategists, the recent outperformance isn’t even halfway back to what it was in early 2016. In a note, Barry Bannister, head of institutional equity strategy at Stifel, said, “Value breakout? We think yes.” That outlook is based on several fundamental factors. The Federal Reserve and the United States government have both injected trillions of dollars into financial markets and family bank accounts, rapidly dragging the economy out of its 2020 hole. According to data from the Federal Reserve Bank of St. Louis, the M3 supply—or the quantity of cash and cash-like assets in the economy—has increased by nearly 25%, to $19 trillion, since just before the epidemic. This will almost certainly signal the start of a new commodities cycle, in which the prices of oil, metals, and other materials will skyrocket. Commodity prices have been strongly associated with the rise of the money supply for more than a century, according to a Stifel graph. Commodity prices, which have risen since September as consumer and business demand has increased, are nevertheless trailing the recent increase in money availability. Commodity prices began a long downward trend just before the financial crisis in 2008, and they bottomed out in 2020. Bannister believes that prices are beginning to rise, and that they could rise by 50% by the middle of 2024. More commodities upside implies more value stocks outperform. The graph of Bannister indicates a strong link between commodity performance and relative value performance. And, according to Bannister’s data, the strength of value versus growth has not yet caught up to the recent price rise in commodities. Value equities should gain 40 percentage points higher than growth stocks over the next four years if the market catches up. Naturally, commodity producers such as oil firms and metals miners benefit from this. Copper miner Freeport McMoRan (ticker: FCX), for example, trades at a low price. It also has a very bright near-term profit projection, suggesting that it could be ripe for the picking. It’s still not too late to invest in value equities. Jacob Sonenshine can be reached at jacob.sonenshine@barrons.com.
Continue reading
