For some reason, there is a great deal of glee about the return of value stocks this month. Even though we are only on the 17th day of September, seemingly ever research department on Wall Street is ready to proclaim that value stocks are back. BAML fits the bill perfectly, saying that value stocks are like a tightly wound spring that is finally uncoiling. In their defense, value stocks have outperformed growth stocks by 9 percentage points this month, the biggest divergence since 2010. Morgan Stanley also notes that there is currently “a massive rotation away from growth-style factors toward value-style”.
FINSUM: It has been a great start to the autumn for value stocks, but they have been in a funk so long that it is hard to believe they have suddenly shed their shackles.
RIAs have been growing at breakneck speed for years. Their growth rates are pretty much the envy of everyone else in finance. But to be honest, they may in fact be growing too fast. Take for instance the case of Creative Planning, a Kansas-based RIA that has tripled its client assets to $42 bn since 2016. Alongside the tremendous growth they have also seen trouble, such as an SEC fine for improper radio advertising and another less infraction. The bigger problem for RIAs is that their own internal systems for control, compliance, and governance may be quickly overwhelmed by the growth they are seeing.
FINSUM: RIAs who are growing organically are having trouble keeping up, but the ones growing through acquisition might have even more trouble, especially with keeping costs manageable considering all the overlap.
It has been for around a decade that value stocks have been getting hammered by growth stocks. The rut has been so bad that many have given up on the discipline altogether. But recently, something has been changing. Momentum stocks, long the darling of this bull market, have started to lag their value-oriented peers. This change started last week and is continuing today, and follows the worst month for value stocks in at least 20 years (this past August).
FINSUM: This is an encouraging sign, but certainly is not enough to say “value stocks are back!”.
The rate cut is not like investors hoped. While the key rate was cut 25 basis point, it did not come with a wealth of dovish future guidance. Still, the cut is going to make a big impact in certain areas, not the least of which is in growth stocks. Growth stocks are likely to pull further ahead of value stocks as “In an environment where rates indeed go lower, growth stocks are just mathematically worth more”, according to MFS strategist Rob Almeida, continuing “So the terminal value for a growth company is higher, because of the discount rate, than it is for a cyclical company”.
FINSUM: The truth is that growth stocks have been doing so well because their growth is real and not just financial (just look at P/E ratios versus the Dotcom bubble). The rate cut will help keep the engine going.
For many years, emerging markets were a must-have in every investors’ portfolio. The idea was that a large swath of the world was on an inevitable path towards economic parity with the west, and that there was a great deal of money to be made by investing in that growth. For several years, that view held. However, changes over the last decade mean that such a thesis is increasingly in doubt as many of the factors that drove EMs have fallen away. In the words of the Financial Times, “high commodity prices are a fading memory. Trade is stuttering and global supply chains are being disrupted. Far from catching up with the developed world, many supposedly emerging markets are growing more slowly”.
FINSUM: It is not just economic either. Governments have not cleaned up as fast as many had hoped, which means the law and governance aspect of EMs has hardly improved.