In a market with declining corporate profits and a stagnant real disposable incomes, growth is scarce. However, with bond yields indiscriminately driving valuations towards records across nearly all sectors (both cyclical and non-cyclical) value is even more scarce, and becoming scarcer as multiple expansion drives US to all-time-highs.
There are many other reasons for the return to value, including crowding within many sectors (e.g. XLP ) and names (notably 'FANG'). With the US market beginning behaving almost like a bond, any sort of yield shock (see linked ideas) could spark a simultaneous sell-off in , causing a rush for the exit in a market with little margin for error. In this event, less crowded/under-owned sectors ('value') would provide a greater cushion for investors and help them weather the .
Bringing it back to textbook market theory, value should outperform growth in a rate hiking cycle. Whilst the consensus expects US rates to remain low, and possibly even be cut, any sort of upside surprise in (energy prices on top of rising core pressures) or economic growth prospects ( oil 'dividend', or the US avoiding a recession in 2017) will likely see the Fed press on with further rate increases following the announcement of the current hiking cycle in December 2015. The repricing of Fed funds implied probabilities for a rate increase following the June and July jobs report illustrated this perfectly.
Natural resources and financials remain the two 'value' sectors in the US with abundant single name opportunities to choose from. Within Europe it is a similar story, with automotive and real estate featuring to a lesser extent.
Consider a spread trade LONG Russell 1000 Value / SHORT Russell 1000 Growth (IWD/IWF) with the ratio towards the lower 2016 channel line, expecting reversion to the middle of the range before making a higher-high.
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