The bad news about Covid is getting crushed again, and the long-suffering fans in the quant community are getting a new blow to their long-suffering fans.
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With governments reintroducing restrictions in the face of the Omicron variant, the case for buying cheap companies that are usually tied to the business cycle is faltering due to risk aversion and the deteriorating economic outlook.
The MSCI World Value Index was underperformed for the fifth day in a row, nearing a five-decade low compared to its growth counterpart after top executives at Moderna Inc. raised fears that existing vaccines could be less effective against the new strain.
The standard playbook from the early days of the Pandemic is being used by investors by bidding up growth stocks that have a reputation for increasing earnings regardless of the twists and turns of the macro cycle.
Think Apple Inc., rather than United Airlines Holdings Inc.
Art Hogan, chief markets strategist at National Securities, said that it sounded like the safest, and it was the well-known horsemen of the technology world. At least this year, value can take a backseat in that environment. The question is whether the omicron variant will prolong the value pain. These shares have rebounded this year on an absolute basis, but their underperformance compared to growth equities has pushed them back near the cheapest since the dot-com era. That is even as they win more earnings upgrades.
The Federal Reserve Chair Jerome Powell signaled a tighter path that could boost the factor, as rising bond yields have traditionally been a boon for the investing style. Safety is in and risk is out across a variety of quant trades thanks to the deteriorating virus-related newsflow.
A market-neutral version of the value factor headed for its biggest four-day decline since June, while a strategy that bets on small-caps had its worst four days in four months, according to the Dow Jones indexes. The quality style favoring steadily profitable shares went to the highest in a year.
It continues the story of the last few years when the macro outlook over the last few years overshadowed the performance of value investing. On that score, value fans may get a hand from monetary policy.
Powell, Chair of the Fed, said Tuesday that the strong economy and elevated inflation could warrant ending the central bank's asset purchases sooner than planned next year. The news helped the short-end bond yields jump as traders rushed to reverse bets that the variant would slow the Fed down.
Factor swings seem to be as much about bonds as equities in 2020.
The Sanford C. Bernstein strategists led by Sarah McCarthy wrote a Monday note saying that we remain tactically overweight as our base case is for higher yields next year. But we recognize that central bank decision making on the correct level of yields in the economy is influenced not only by inflation expectations but also by other risks such as the outlook for growth and levels of debt, which could affect the timeline of higher yields. The Russell 1000 Value Index has risen 16% this year in the global risk boom, while strategies deployed by hedge funds that are sector neutral have held onto their 2021 gains despite the latest virus worries.
In terms of the widely tracked indexes, the value s comeback was still no match for growth s continued rally, as the love for tech names proved enduring. The Russell 1000 Growth Index is up 24% in 2021 so far.
For anyone buying at today s valuations, value fans see a good case in the long run. The factor is close to the cheapest versus growth since 2000, whether or not one is comparing its price to forward earnings, sales or book value.
The reason for this is that the value's profits rose faster than its price in the economic reopening. These shares look cheaper when compared to earnings. In terms of earnings upgrades, value is still beating expensive stocks, according to Bernstein.
The worry is that the omicron variant could overwhelm the fundamental case for the factor.
Dennis DeBusschere, founder of 22 V Research said it was a good case to make a strong case for value until we know more about the virus severity data.
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