OPINION: Inflation and interest rates tend to rise during economic rebounds. Both trends are a negative for growth stocks relative to value, columnist mbrushstocks writes.
Investing is all about being in tune with the trends. Here’s one to be aware of for 2022: Value stocks will most likely beat their growth counterparts.* The Vanguard S&P 500 Growth Index exchange traded fund VOOG, +0.29% is down 5.6% year to date, while the Vanguard S&P 500 Value Index fund VOOV, -0.22% is flat.
So naturally, when 10-year yields rise as they are now, expensive stocks in areas like tech underperform the cheapest stocks in areas like cyclicals, financials and energy, points RBC Capital Markets strategist Lori Calvasina. Here’s a chart from RBC Capital Markets showing that value historically outperforms as yields rise. The light blue line represents bond yields, and the dark blue line represents cheap stock performance relative to expensive stocks.
In contrast, growth names are characterized by expected earnings, so they benefit less from price hikes. 4. Value stocks do better when Covid cases decline This has been the case throughout the pandemic, as you can see in the graphic below from Bank of America. This is probably because when Covid cases decline, the prospects for the economy improve, which suggests inflation and interest rates will rise — both of which make growth lag value, historically. Omicron is spreading so fast, the case count is likely to peak by the end of January. So this effect may kick in soon.
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