February 24, 2019 / 12:02 PM / 24 days ago

RPT-Wall St Week Ahead-May be time for growth to run out of gas

 (Repeats with no change to text)
    By Chuck Mikolajczak
    NEW YORK, Feb 22 (Reuters) - A return to fashion of growth
stocks in 2019 helped lead the overall market out of a year-end
shakeout, but another multi-year run of growth performing better
than value may not be in the cards.  
    The S&P 500 has rallied nearly 18 percent since its
Dec. 24 low. During that time the Russell 1000 Growth index
 has fared even better with a gain of almost 20 percent
while the Russell 1000 Value index has lagged with a gain
of about 17 percent. 
    That marks a reversal from the fourth quarter, when value
outperformed as stocks nearly tumbled into bear market
territory, a trend some analysts feel will return as the market
grapples with several major headwinds such as Brexit and trade
    Growth investors typically search for companies that have
higher profit growth and margins, while value investors look for
stocks that seem inexpensive.
    Shortly after the S&P hit its most recent record on Sept.
20, thanks to the outperformance by growth, especially
technology stocks, the spread between the Russell 1000 growth
and value indexes had surpassed the levels hit during the end of
the dot-com era. The fourth quarter selloff helped that narrow
but it began to widen again shortly before the new year. 
    "The valuation imbalance we have seen between growth and
value in the largecap space ... when we have seen that
inflection point in the past there has been a very powerful
long-term rally where value has outperformed growth and we think
that is coming up," said Phil Orlando, chief equity market
strategist, at Federated Investors, in New York.

    In a recent note to clients, Morgan Stanley equity
strategist Michael Wilson said that the stocks that got hit
first and hardest during last year's "rolling bear market" would
lead the recovery this year and rally the hardest. That
prediction appears to be playing out as areas such as
transportation, considered cyclical value, have been among the
leaders to the upside this year. 
    Wilson anticipated the Federal Reserve will hold off raising
interest rates further and that the global economy would bottom
in the first half. He favors value over growth, with a focus on
cyclical over defensive stocks. 
    Value stocks also remain cheap relative to growth shares,
with their widest forward price-to-earnings ratio spread in over
a decade. And while investor worries about a recession, which
helped fuel the fourth-quarter sell-off, have abated, a number
of headwinds remain that could make value more attractive as
market uncertainty rises.
    "There are still a lot of headaches coming, whether it is
Brexit, China - what is the (trade) package going to look like?
- the legal stuff in Washington," said Steve DeSanctis, equity
strategist at Jefferies in New York.  
    The Russell 1000 Value forward PE also sits right at its
long-term average of about 13.8 while the Growth index is nearly
20, well above its historic average of 17.5. 
    One challenge, even though value is relatively cheap, is
that financials have a heavy weighting in value indexes and a
Fed pause will make it harder for those firms to grow profits. 
    Even though, as of the last reconstitution of Russell
indexes in June, the financial services sector saw the most
significant decrease in index weight in the largecap 1000 value
index, it still was 29.1 percent. In the Russell 2000 Smallcap
Value financials command a weighting of 40.5 percent.
    "If value is going to work, it has to be financials," said
Mark Stoeckle, CEO at Adams Funds in Baltimore in an interview
with Reuters. 
    "The one thing people were counting on in the first half of
2018 with the Fed was it was going to continue to raise rates,
this (was) going to be good for banks – and not so much

 (Reporting by Chuck Mikolajczak; editing by Alden Bentley and
Phil Berlowitz)
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