Dow Jones Average Industrial Earnings as Value Shares Mark Long-awaited Return

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That's what Wile E. Coyote feels after the Road Runner is with him.

We are not referring to the global market, which seemed to be a rather quiet week, albeit slightly productive. The Dow Jones Industrial Average gained 27219.52 points, or 1.6%, up 422.06 points; the S & P 500 index rose 1%, to 3007.39; and Nasdaq Composite rose 0.9% to 8176.71.

But these numbers completely miss the point. It was a week when everything that worked stopped working, when the losers became winners. Value stocks, the cheapest in the market, had underperformed growth stocks by 14 percentage points since the beginning of 2018.

Too bad for those who bet that recent trends will continue. Last week, value rose 2.4%, while growth fell 0.5%. The Russell 2000 small-cap beat gained 4.9%. It was as if the sweet had inherited the market.

The iShares MSCI USA Momentum Exchange Traded Fund (symbol: MTUM), which holds a portfolio of the best-performing stocks, including
Procter & Gamble

(PG) and
MasterCard

(M), fell 2.3% last week after climbing 23% this year to September 6th. It's as if Momentum's actions had climbed a flight of stairs to realize they had not noticed it had ended in midair.

This sudden reversal of stocks was not surprising, says Chris Harvey, Head of Equity and Quantitative Strategies at Wells Fargo Securities. "Generally, the momentum" takes the escalator and the elevator, "he writes. "In our view, dynamic investing requires a tacit agreement with the heck of the investment: a [portfolio manager] usually wins with a higher frequency for a while, but when they lose, recovery is painful. "

However, this may not be another trend reversal. Doug Ramsey, chief investment officer of the Leuthold Group, notes that the MSCI USA Momentum Index has reached an all-time high on August 29 compared to the MSCI USA Value Index and that it has been falling since . This ratio also peaked in March 2000, Ramsey notes, at the height of the dotcom bubble, as did the S & P 500. This spike began the transition of stock value with strong flight dynamics and ultimately helped trigger a recession.

"In this cycle, the resilience of the stock markets is the main factor that dissuades us from predicting an impending recession," Ramsey writes. "But the 2000-01 experience reminds us that stock market problems can sometimes precede a recession with a longer delay."

Of course, there are big differences between the dot – com era and today 's era. The first is the current massive pessimism vis-à-vis the optimism of nearly 20 years ago. Then there's the fact that the cost of capital, as indicated by the level of real rates, is well below what it was in 2000, says Michael Arone, chief investment strategist at State Street Global Advisors. This makes companies grow fast but without attractive profit for investors, he explains, and explains why value stocks will lag behind as long as real interest rates remain close to zero.

Given that the US Federal Reserve is preparing to cut rates on September 18, this should not change. "The comparison with 2000 is unfair," says Arone. "In an investment-free environment, businesses at a loss can grow to incredible size."

The sheer number of these companies could indicate future problems. According to Jason Williams, portfolio manager at Lazard Asset Management, nearly 15% of the fastest growing companies in the S & P Global Broad Market Index are losers, while more than 80% of offers entering the market are also unprofitable. equaling the peak of the Internet bubble.

That's not to say that the market is in the lead, he says, but it worries him. "Of course, no one can ring the bell," says Williams. "All you can do is report it."

Remember: Hunting runners can be dangerous for your health.

Write to Ben Levisohn at [email protected]