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By Mike Liss - October 2019
Value stocks rallied this latest quarter and performed evenly with growth stocks for the first time since 2016. It’s too early to declare victory, but regardless, we’re still pushing forward to find the best balance of risk and reward for clients.
Looking at the economy, several crosscurrents are out there having an impact. Among those are flat corporate earnings, ongoing trade war rhetoric and a slowdown in manufacturing. In addition, the Fed’s interest rate cut, and the inverted yield curve sparked recession fears.
We’re not raising the recession flag, but believe these conditions represent a slowing economy. Plus, there is still good news in the service sectors and with consumer sentiment—even a little bit of inflation won’t be bad news.
Watch my latest video for more of my thoughts on the economy and where we’re seeing the best opportunities now for value investing.
During the third quarter, value has actually performed evenly with growth, and we haven’t seen that since I believe the fourth quarter of 2016. It’s too early to declare any kind of victory; that we’re not doing. We’re just working for our clients trying to find the best risk/rewards for them.
There are a lot of cross-currents going on out there right now. You’ve got corporate earnings. They have really re-based during the year and are now forecasted to be flat year-over-year. You’ve got a lot of rhetoric on the trade front. The president really upped the ante in the beginning of August by saying he wants to put tariffs on those goods from China which have previously not had tariffs applied to them. And when you put the manufacturing slowdown together with the increasing trade war rhetoric, interest rates have really come down precipitously in the United States.
We’ve been concerned about the Federal Reserve lowering interest rates for years. Following the global financial crisis, the Federal Reserve lowered interest rates to zero. They finally started raising them a couple of years ago, and now with unemployment at multidecade lows, and the stock market at or near all-time highs, they’re beginning to lower rates again. And yes, that may mean they have less ammunition should we roll over into a recession. That’s not our base case; we think the economy has slowed, but we don’t think we’re headed into a recession.
It’s not all bad, however, because the Purchasing Managers’ Index for services is continuing to stay in positive or expansionary territory in the United States. Why is that important? Services are a much bigger part of the economy in the United States than manufacturing is. Those indexes that measure consumer sentiment have been positive as well. And so, you put that all together with a little bit of inflation starting to tick back up in the U.S., we think that’s a positive thing. We’d like to see a little bit more inflation.
We think we’re seeing the best risk/rewards in the cyclicals. Because the economy has slowed and there are fears of a recession because the yield curve has inverted, the stocks that have underperformed are the banks, capital market companies, energy companies, industrials. And that’s where we’re seeing good risk/rewards for our clients. So, we’re seeing sectors that are perceived as being safer—like utilities, REITs and consumer staples—we’re seeing those with expensive valuations and are not good risk/rewards for our clients.
Get additional insights in our latest Investment Outlook.
Value Portfolio Manager Mike Liss sees pockets of opportunities in four areas—provided social media and inflation don't disrupt markets.
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