Shifts in investor appetite, fixed-income signals, and portfolio-management trends among possible factors at play
Value stocks have been plagued by unremarkable-to-disappointing returns ever since the 2008 financial crisis — and possibly even before that — with few periods of relief. That included a sudden shift in early September, which saw value stocks rally compared to growth stocks that have been paragons of performance for most of the past decade.
“A relationship that has become more apparent in recent years drove that shift: Value stocks perform better when the yield curve gets steeper,” reported the Wall Street Journal.
According to the Journal, that link was absent from markets 10 years ago, but several investors and analysts have seen it grow more pronounced especially since 2016.
Joseph Mezrich, quantitative investment strategist at Nomura subsidiary Instinet, theorizes that the emerging relationship is due to investors becoming leery of companies that might struggle to get funding during a slowdown.
“The difference is liquidity: those companies that have cash and those that don’t,” he told the news outlet, noting the inability of value stock companies to bolster their balance sheets with cheap, longer-term debt.
Another take from Goldman Sachs multiasset strategist Christian Mueller-Glissman focuses on Treasury yields, which could be emitting different signals from before. Sustained demand for long-term government bonds, fueled in part by aging investor populations, could be having a greater effect on yields.
Past economic cycles have seen yield curves flatten as central banks raised rates, lifting short-term yields. But today, fears of a slow-growth “Japanification” of the US economy could be stoking demand for safer long-term bonds, effectively pushing yields down.
“[A steeper curve] signals Japanification has less probability, so investors think maybe the premium on growth stocks is too high and the discount to value too large,” Mueller-Glissman said, which would boost demand for bonds.
The increased use of factor-based investing products could also be playing a role. With more investors piling into growth and out of value, both growth-backing and value-eschewing positions have become crowded.
One more working theory looks at the wider use of cross-asset investment analysis. More investors are weighing risks and returns across stocks, bonds, and other exposures, as opposed to the previous approach of specializing in single areas. That, coupled with the growing prominence of factor investing, has created more situations where price changes in one silo rapidly ripple into another.
“You start understanding better the risks, and if the market moves in a certain direction, investors’ positioning changes with it across assets more rapidly,” Vitali Kalesnik, director of research in Europe at Research Affiliates, told the Journal.
