EC Is The End Of The Value Trade Near?

The end of the value trade may be near as investors push prices beyond economic growth expectations.

Interestingly, it was just last year that I wrote: “The Rotation To Value Is Inevitable.” The critical point of that article was this:

“The market’s surge higher since the financial crisis, which has been driven by massive fiscal and monetary policies. It has been nothing short of extraordinary. Currently, the S&P 500 is trading at the greatest deviation from its long-term exponential growth trend in history.”

End Value Trade, #Technically Speaking: Is The End Of The Value Trade Near?

The unparalleled monetary policy use to push markets higher, massive fiscal spending designed to keep economic growth positive, and corporations shunning future growth for “share repurchases” remains the common thread.

As Michael Lebowitz, CFA, previously noted:

“As a result of these behaviors and actions, we have witnessed an anomaly that historically spelled success for investors. Stronger companies with predictable income generation and solid balance sheets have grossly underperformed those with unreliable earnings and over-burdened balance sheets. The prospect of majestic future growth has trumped dependable growth. Companies with little to no income and massive debts have been the winners.”

Such was much the same as we saw in late 1999 as companies with no earnings, no revenue, and no real strategy for growth exploded higher in a speculation-fueled buying frenzy.

Is It The “Great Rotation?”

Since the end of last year, the “value” rotation finally did get underway, with the energy sector leading the charge. Industrials, Materials, and Financials joined the advance as expectations for “infrastructure spending,” and “reopening” grew. The chart below shows sector performance relative to the S&P 500 index over the last 120-days.

(Click on image to enlarge)

End Value Trade, #Technically Speaking: Is The End Of The Value Trade Near?

Historically, when rotations to “value” have occurred, it has accompanied significant market reversions and a break of the previous “bullish” psychology. The accompanying destruction of capital pushed investors into requiring a “margin of safety.”

Such was not the case this time as investors chasing “growth” rotated to pursue the market’s laggards. In other words, as I noted this past weekend:

“With the ‘value trade’ excessively overbought and has become the recent ‘momentum’ trade, we may see a relatively rapid rotation back into recently beaten-up sectors.”

As shown below, the performance between “growth” and “value” has now inverted.

(Click on image to enlarge)

End Value Trade, #Technically Speaking: Is The End Of The Value Trade Near?

The question that we must answer is whether the rotation is sustainable in the future.


Value In Name Only

Ben Graham heavily espoused the importance of a “margin of safety” in the investment operation. The margin of safety suggests an investor only purchases securities when their market price is significantly below their intrinsic value.

Followers of Ben Graham’s teachings have a deep history of long-term investing success, from Warren Buffett to Seth Klarman:

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