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The Second Wave (of Value Stocks)

  • Value has outperformed growth since the end of August with particular relative strength among “cyclical value” stocks

  • We assert that the global normalization trend will benefit Energy and Financials

  • Defensive value sectors trade at a historic discount to the S&P 500, making the niche a strong safe-haven should volatility persist

Cyclical Value’s Relative Strength

Energy and Financials are the best performing sectors since the end of August. Rising global oil prices and increasing interest rates are the fundamental drivers. Those two groups—comprising only about 14% of the S&P 500—were not able to offset sizable losses in growth sectors last month. Nevertheless, recent price action in what we deem “cyclical value” is intriguing.

Defensive Value’s Near-Term Weakness

The flipside of cyclical value is defensive value—made up of Health Care, Consumer Staples, and Utilities. It’s been a very rough stretch for that trio lately with Staples falling to all-time lows relative to the S&P 500. Utilities have faltered as well with a brutal 14-day losing streak in September. The relative chart of Health Care vs. SPX is not encouraging either.

Value vs. Growth: A Nuanced Look

This week’s featured chart is pulled from our Quarterly Strategy Pack. The Quarterly Strategy Pack was one of several upgrades and enhancements to the Topdown Charts service last year. You can get a trial to view all of the detailed Core Views and Interesting Ideas. We also outline our research process & philosophy in addition to position summaries across all major asset classes.

Among our interesting ideas is a review of Value (the 2 types) vs. Growth. While the turn in Value vs. Growth remains a work in progress, it seems investors are getting excited for round two of outperformance from cyclicals—a la what we saw in Q4 2020 through the first several months of this year.

Growth’s September Tumble... Again

It’s almost déjà vu all over again considering that September, for the second year in a row, saw tech-related shares pull back. Our flagship Weekly Macro Themes report keeps a finger on the pulse of such significant thematic shifts. Digging deeper, Value’s relative strength was seen almost exclusively in the cyclical type of value, while defensive value lagged. (Utilities have been the worst-performing sector since the end of August and Health Care ranks 3rd to last.)

Look for cyclical value to continue to be the key performance driver as the recovery/normalization narrative persists. We assert that the macro/market stars seem to be aligning for a longer-term turning point in Value vs. Growth.

Cyclical Value: A Technical Take

The technical picture may be encouraging for cyclical value, too. The featured chart shows a potential reverse head and shoulders pattern for Energy & Financials (relative to the S&P 500) after breaking to all-time lows last year. Indeed, a second wave of outperformance from Energy and Financials would no doubt cause the blue line to breakout. It’s something macro traders must keep on their radars.

Featured Chart: Cyclical Value Bottoming?

Defensive Value: A Fundamental Outlook

It’s not all about technical setups, though. Our Quarterly Strategy Pack details a bullish longer-term fundamental case for Defensive Value based on relative valuation. We contend that the significant discount among Healthcare, Staples, and Utilities will make that group a robust safety play during a market correction/bear market. Moreover, ETF market share for these three sectors hovers near 15-year lows.

Bottom Line: Value is back in vogue after a Q3 lull. Our Quarterly Strategy Pack details the case for cyclicals and defensives—each featuring an optimistic trait. Our chart-driven macro insights are vital for global investors managing risk.

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