Barron\'s - 16.09.2019

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40 BARRON’S September 16, 2019


FACTORS nBy Evie Liu


The Great Rotation


Value stocks show signs of a comeback—at long last


IT MUST BE A PRETTY DULL WEEK IN THE


stockmarketifeveryone’stalkingabout


factors.


Stock groups with different charac-


teristics—so-called factors—had been


runninginverydifferentdirectionsover


the past few months. The market’s best


performers, known as high-momentum


stocks, and the least volatile, known as


low-vol stocks, had outperformed as


investorsshunnedthecheapest,smaller,


more-volatile ones. In July, the perfor-


mance gap between the two sides was


wider than at any point in market his-


tory,accordingtoJ.P.Morgandata,even


surpassing the spread during the tech


bubble in the late 1990s.


Nowthattrendhassharplyreversed.


FromSept.5toSept.10,theMSCIUSA


MomentumIndexdropped3.1%,andthe


S&P 500 Low Volatility index fell by


1.1%,evenasthebroaderS&P500index


remained largely flat.


Valueandsmall-capitalizationstocks,


meanwhile,havesprungtolife.TheRus-


sell1000ValueIndexgained1.6%,while


the small-cap Russell 2000 jumped


2.1%—even as the Russell 1000 Growth


index declined 1.4% and the large-cap


Russell 1000 rose by only 0.1%.


Don’t be surprised if this rotation


remainsinplaceuntilatleastOctober—


and perhaps even longer than that.


What was behind the sudden shift?


Beforelastweek,investorsappearedto


be betting that bond yields would fall.


Andforawhile,thattradeworked.Both


momentumandlow-volatilitybasketsare


loadedwithdefensivestocksthattendto


riseasyieldsfall—asignalthatbondin-


vestors are losing faith in the economy.


Nolonger.The10-yearTreasuryyield


rosefrom1.461%onSept.3to1.733%on


Sept.10,whiletheyieldcurve,whichhad


been inverted, steepened. “The extreme


factormovesweareseeingintheequity


marketaredrivenbyactivityinthefixed-


incomemarket,”NomuraInstinetstrate-


gist Joseph Mezrich wrote on Tuesday.


There’sagoodreasonforthat.Asin-


vestorsturnedmoredefensivethisyear,


low-volatility stocks have attracted sig-


nificantassetsacrossbothretailandin-


stitutionalplatforms.Andthathasmade


them expensive. Christopher Harvey at


WellsFargonowrecommendsthatinves-


torsreducetheirexposuretolow-volatil-


itystocks,astarkcontrasttohisposition


at the beginning of the year.


“About a year ago, we talked about


low-volstrategiesbeingoneofthemost


unlovedandunderappreciatedstrategies


in the marketplace,” wrote Harvey on


Tuesday.“However,thestyleisnolonger


thetechnicallyoversoldandunderowned


strategy it was in years past.”


As we’ve noted, the momentum bas-


ket has recently shifted from being a


group of fast-growing companies to in-


cludemanyofthemarket’sleast-volatile


stocks.Thosearealsotheonesmostde-


pendent on yields going down, explains


Bernstein analyst Sarah McCarthy.


“Themarketwaspayingforcontinu-


ity of the current macro trend, rather


thanpayingforgrowthcharacteristicsof


stocks,”shewrote.“Themoveupwardin


yields over the past few days seems to


have triggered this factor rotation.”


The question now: Does the reversal


have staying power? To answer it, we


needtoconsiderwhatcouldcauseinves-


torstoagainprioritizesafetyoverallelse.


For J.P. Morgan strategist Marko


Kolanovic, that would be a failure of the


trade discussions between the U.S. and


ChinascheduledforOctober.Ifthenego-


tiations fail, the recent moves could well


be unwound. If progress is made, how-


ever,itwillbuythemarketmoretimefor


theglobalmonetaryandfiscalstimulusto


take effect—and for the rebound to con-


tinue.Beforethat,thereisnowawindow


ofatleastthreeweeksforbondyieldsto


continue to rise and for stocks to move


higher,especiallyafterPresidentDonald


Trump delayed a rise in tariffs to mid-


October.


Onewaytoplaythecurrentrotation


infactorsistobuythesmall-capcompa-


niesintheenergyandmaterialssectors,


Kolanovic says. The group has been hit


particularly hard since it was at the


nexusofsellingbylow-volatility,growth,


andmomentuminvestors.“Normalization


oftheseextremeconditions,andrelated


feedback loops, may create unusually


high upside in this market segment,”


wrote Kolanovic in a Tuesday note.


At least until the next rotation.


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