Buy the dip, JP Morgan strategists wrote early last week. As for calls for courage, it wasn’t exactly Churchill during the Blitz.
The drop in this case was a 2% drop, year-to-date, from the
bringing its 10-year gain to 261%, not including dividends. Also, many of this year’s biggest individual divers have been low-profit high-level players, like the cloud player.
(ticker: SNOW), or assets backed by suspended disbelief, like crypto.
But these are quibbles. I take JP Morgan’s broader point that an expected rise in interest rates doesn’t have to derail stocks. Yes, the US inflation rate just hit 7%, the highest since 1982 when ET called home and the rich kid down my street got himself a Commodore 64 computer – his old man worked for IBM. And yes, there is a growing consensus that some of this additional inflation will persist and that action is needed.
“The problem is, as this inflationary mindset feeds into prices and wages, the Fed has to respond by hitting the economy on the head with a brick,” says Edmund Bellord, portfolio manager at Harding Loevner. .
But the starting point for rates is so strongly negative after adjusting for inflation, he says, that raising rates might not be so bad for equities.
JP Morgan is now comparing to the end of 2018, when rate hikes triggered a sell-off in stocks, and the Fed then reversed course. At the time, the starting point for real rates was positive and the economy was weakening.
This year, the bank predicts, will be characterized by the end of the pandemic and a full global recovery. This hinges on his expectation that “Omicron’s lower severity and high transmissibility crowd out more severe variants and lead to broad natural immunity.” For my part, I can’t wait to go back this year and refuse to travel because of the exorbitant prices, rather than fear of infection.
Rather than buying the bob, or the waffle, or whatever the market term for a not-quite-low, consider buying something that’s going up: value stocks. the
Invesco S&P 500 Pure Value
exchange-traded funds (RPV) is up 7% this year. It tracks a basket of large US companies that look cheap, relative to earnings, sales and book value of assets.
Invesco S&P 500 Pure Growth
(RPG), which owns companies with strong earnings growth and strong price momentum, is down 7%.
Low interest rates flatter growth stock valuation calculations; when bond yields are miniscule, investors might as well put their money into promising companies whose cash flow won’t increase for years. Growth has beaten value by about 100 percentage points over the past decade, using the aforementioned ETFs.
During the pandemic, the performance difference widened as the Federal Reserve used bond purchases to drive yields further down, and spending shifted in favor of growing online services.
Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, says price-to-earnings ratios for growth stocks fell from 22 to 31 during the pandemic, while those for value stocks rose more modestly, to 16. against 13. The difference between the current two figures – 15 – compares to a historical average of six.
Ironically, value stocks are expected to produce faster earnings growth than growth stocks this year, according to Credit Suisse. Indeed, businesses that have been hit hard by the pandemic are expected to rebound as it subsides.
There have been many false starts for a shift to value stocks over the past decade. This could be one of them if the economy falters, inflation slows and interest rates stay at zero. Either way, a massive shift into value stocks seems unwise.
“There’s always this huge digitization effort in American companies,” says Marcelli. “Are we saying that value is going to outpace growth over the next five years? Not necessarily.”
But looking at returns over the past decade, the S&P 500 has performed better as this growth ETF than the value one. This is because the index and the growth ETF have at times been dominated by the same tech giants that beat the world. It worked well, but it also left passive investors all-out on growth.
A simple adjustment is to buy a value ETF. A less straightforward method is to buy individual stocks from bargain-priced names that have outperformed the market this year. A quick analysis of the S&P 500 shows healthy gains for
(CMI), Royal Caribbean Group (RCL),
Citizens Financial Group
I worry about the UK. Michel Doukeris, the new CEO of
(BUD), the largest brewer in the world, told me that they sold so many draft beers there that there were now more of them than the pubs. How is someone going to leave the house? If you haven’t heard from friends there in a while, check in or at least send some pretzels.
The order of Doukeris is great. AB InBev started the beer industry, but its stock returns have fallen over the past decade. Demand has shifted, especially during the pandemic, to spirits and sparkling, fruity products in cans, such as hard seltzers and ready-to-drink cocktails.
AB InBev has it too, but it’s awash in beer. Doukeris says it’s time for growth and deleveraging.
Growth will come from new products around the world, such as one called Brutal Fruit in South Africa and Cutwater Spirits in the United States, and new services, such as cold beer delivery in 30 minutes or less in some markets. Good news, Florida: Doukeris says he’s been testing home beer taps in Miami.
It also plans to use AB InBev’s scale more. Some ideas seem more immediately deliverable than others. Sell more marketing, distribution, financial and technological services to small players? Logic. Turn spent grains into protein so I can dive into it for dinner? Not even if you throw in a Brutal Fruit sixer.