It’s reflation that’s turning the ‘Great Rotation,’ these analysts say

There’s some value in value, again.

  • By Andrea Riquier,
  • MarketWatch
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

It may sound a little like what you do to your car tires, but the “Great Rotation” in stocks actually tells us a lot more about what investors are thinking about markets, the economy, and more. And right now, that picture is reminding one analyst team of the period right after the surprise presidential election of 2016.

For much of this year, investors were trading as though the end of the business cycle was close at hand. Throughout this year, so-called momentum stocks were on fire. Now, investors are dumping those stocks in favor of value stocks. Ned Davis Research analysts suggest that’s due in part to markets “reflating.”

A “reflation” in markets and the economy are when inflation and interest rates pick up. The last time the term got so much press was right after the surprise presidential election of 2016. Investors believed that a Republican lock on Washington would bring about economy-boosting tax cuts, while lower tax revenues would require more government borrowing, and thus higher interest rates.

When that happened, investors sold bonds, expecting that higher interest rates would make the value of outstanding bonds, with their streams of fixed income, less valuable. The yield on the 10-year Treasury note, jumped 40 basis points over the course of one week.

Writing on Thursday, Ned Davis analysts reference “hints” of reflation in markets now, but it only takes “hints” to set off what they call a “violent reversal.” The 10-year has moved just as much over the past two weeks as it did in 2016.

Many investors are likely familiar with the “value” proposition made famous by Warren Buffett and other investors: buy low, sell high. Momentum is a little less straightforward, but a very crude shorthand might be “buy high, sell higher.”

With that in mind, the reason investors have embraced momentum this year might be: if economic growth is already at full throttle and likely to downshift from here, it’s safer to stick with the big winners. But if something – say central bank easing – buys the expansion some extra innings, there might be more value in the value trade.

As MarketWatch wrote Thursday, some of the biggest holdings in the iShares Edge MSCI Momentum Factor ETF (MTUM), have outpaced the broader stock market this year. Shares of Visa Inc. (V), have jumped 35%, Microsoft Corp. (MSFT), is up more than 35%, and Starbucks Corp. stock (SBUX), is up a whopping 42%, compared to a 20% increase in the S&P 500 (.SPX).

Meanwhile, momentum funds also tend to have a lot of defensive stocks – those that do well when the economy and bond yields turn down. If yields are reflating – turning up – that may spur selling in defensives.

There’s a similar logic behind the stocks of smaller companies compared to mid- and large-cap ones. If growth falters, companies with bigger balance sheets and more resources will weather the storm better than smaller ones, which are also often – though not always – younger.

Indeed, as the Ned Davis analysts point out, “The last time small-cap value outperformed large-cap momentum by more than 5% over two days was after the 2016 election.” The spread between two funds that track those ideas, MTUM and the iShares Russell 2000 ETF (IWM), at the start of this week “rivals the Trump Bump,” they added.

For the week to date, MTUM is down a little more than 2%, while IWM has gained more than 5%.

Some other numbers from Ned Davis: a fund tracking gold miners (NUGT), has lost 15% this week, signalling a turn away from ultra-safe assets. Another that takes a “bearish,” or negative, view on bonds (DLBS), has soared over 46%.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2019 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

You May Also Like...

Employers match student loan payments with 401(k)

Many workers with student loans postpone saving for retirement. Now, a handful of companies are trying to prevent them from falling behind on retirement savings by matching their student-loan repayments with contributions to a 401(k) plan.

How to shop for an HSA

If you have a high-deductible health insurance policy and want to open a health savings account (HSA) on your own, consider these tips to help guide your choice.

7 inexpensive, high-dividend ETFs to consider

The universe of exchange-traded funds is growing as issuers keep reducing their costs to lure investors. Consider these seven high-dividend ETFs with very low fees.