The Recent Rally for Value Might Not Last

The Recent Rally for Value Might Not Last

Value stocks have outperformed as the economy has emerged from recession, but the question remains whether the performance “has legs.” This according to a recent article in Barron’s.

The strong performance of value stocks in the fourth quarter of 2020 “marks a sharp shift from earlier in the year,” the article says, adding that the shift is not due to “a fundamental change in the way the market is working, at least not yet. Rather, it’s because investors expect economic growth to rebound.” Such a rebound could reasonably benefit cyclical stocks in the oil, financial, manufacturing and consumer-discretionary sectors, with a potential for inflation to be reflected in product pricing as well.

While such expectations may be logical given the Covid-19 vaccine distribution program underway and the new fiscal stimulus package, the article notes that the “recent rotation into value may merely be a function of an expectation that economic activity will rise with the end of the recession and then stabilize, causing value’s outperformance to dissipate.”

The article explains that some Wall Street strategists expect growth stocks’ earnings momentum to carry them to strong gains and argue that “valuations have become more reasonable in the past several months. That doesn’t mean value can’t run hot alongside growth, but longer-term outperformance may be unlikely.”

“Value stocks can continue to outperform for a while,” the article concludes, “but don’t be shocked if they fade just as quickly.”