Value stocks have been hit harder than most as coronavirus worries and an oil price war have punished sectors that are mainstays of the investment style favoring companies that look relatively cheap.
While strategies targeting growth stocks with a lot of momentum behind them have consistently outperformed value investing over the past decade, prior pullbacks in the market saw value narrow the gap.
However, the most recent plunge has seen value suffer as financials and energy — two of the bigger weights in value — have been crushed by a drop in yields and oil prices.
“A lot of the value space is in the crosshairs,” said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.
“A big chunk of the value universe is in energy which is getting its head taken off. Financials are going down because bond yields are going down.”
Since hitting a closing high on Feb. 19, the Russell 3000 Growth index dropped 25.4% through Thursday’s close. The Russell value index fared even worse, plunging 29.8%.
Over the past decade, the performance gap between the Russell 1000 Growth index and Russell 1000 has widened considerably, as investors have flocked to growth names such as Amazon.com, Apple and Microsoft.
Although the weighting of the energy sector has decreased as the stock prices of companies in the space have declined along with oil prices in recent years, the group still holds a much larger position in value indexes than growth.
More recently energy shares have been plagued by a plunge in oil prices to three-year lows as the coronavirus outbreak stoked demand concerns and a price war erupted last week between major suppliers Saudi Arabia and Russia.
The sudden drop has put energy companies at risk of a credit crunch and increased concerns about potential defaults.
Still, the rock bottom prices of the stocks and high dividend yields do offer some temptation for investors.
“I see some of these prices on energy stocks and you just say oh my god, at least for a trade, at some point this is just a brilliant trade,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
“I don’t care if oil is going to go away in 20 or 50 years or whatever, when all this reverses it could be something and it could return with as much vengeance as this selloff.”
In a note to clients on Friday, JP Morgan analysts recommended investors raise their strategic allocations from a 60/40 equity bond allocation to 80/20 ratio with the Fed projected to move to a zero interest rate target “soon, if not next week” at its next policy meeting.
The likely drop in rates will continue to punish financials, the largest weight in value, which have underperformed as central banks have maintained easy monetary policies since the financial crisis, keeping interest rates and bond yields low.
That view on rates led JP Morgan to recommend an overweight toward bond proxies with high dividends such as real estate investment trusts and underweight banks and insurers.
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