It seems that with each pullback that has hit the market over the past decade, the idea is floated that a real rotation to value from the high-flying growth stocks that have dominated in recent years is imminent.
However, against a backdrop of an accommodative Federal Reserve, a strong economy and low inflation, high-multiple stocks have persisted in pushing higher and leading the market. As these variables augment, there arises a serious question as to whether this time is different.
According to some experts examining the market ahead of an all-important Fed meeting Wednesday, this could very well be the case.
"'This time it's different' are the four worst words in investing. However, we believe this time it definitely is true and things are different," Chuck Etzweiler, Senior Vice President of Research at investment advisory firm Nepsis, told Real Money. "With rising rates and inflationary pressures, we suggest investors shift away from companies with speculative futures and towards those with stability and quality fundamentals that set them apart in this era of restrictive federal policy and inflationary pressures."
Hitting the High-Multiples
Unfortunately for many, this advice was not heeded prior to the start of 2022, leading to quite a bit of pain for growth-focused investors.
For example, growth stock stalwart ETF Ark Innovation (ARKK) is down 27% year to date, while some of its top picks like Tesla (TSLA) , Zoom Video Communications (ZM) , Coinbase (COIN) , and Roku (ROKU) feel similar levels of pain.
"One of the most interesting observations is the comparison of Cathie Wood's ARK Innovation fund to Berkshire Hathaway (BRK.A) (BRK.B) since the start of the coronavirus pandemic," Creighton University professor of Finance Robert Johnson commented. "ARK was outperforming Berkshire by a substantial margin until the recent growth market downturn. It seems to show that you shouldn't count the tortoise out in a race with the hare."
To be sure, many maintain that giving up on growth stocks altogether is not the advisable strategy.
For Gene McManus, Managing Partner at AP Wealth Management, the move is somewhat natural even outside of the looming pressures from the Fed.
"Last year large-cap growth stocks outperformed large-cap value stocks by over 32%," he explained. "Last year's winners are often this year's losers."
McManus added that while investors are likely to be less patient with these stocks given the sentiment shift, there is still promise in many stocks for the future.
"These companies are victims of their own success and financial performance will eventually suffer due to tighter governmental regulations due to policing and data sharing and use," he noted. "Growth stocks' value is in the future."
Positioning Your Portfolio
Nonetheless, in the near term, McManus advised financials, industrials, materials, and energy as the sectors most likely to outperform. He is not at all alone in this projection either.
"Energy stocks will outperform in this rotation," Nathan Rex, Chief Investment Officer at Eigenvector Capital, told Real Money. " I think that the underinvestment in the sector, largely hampered by government regulations limiting drilling, will make energy stocks a reasonable opportunity because of artificial limitations on production expansion."
Certainly, thus far in 2022, this is a dynamic that has paid out profitably for patient investors in the sector. In contrast to tech stocks taking a hit, the Energy Select Sector SPDR Fund (XLE) has risen about 15% while harder hit components like Occidental Petroleum (OXY) and Schlumberger (SLB) have risen by even greater percentages.
"Financials and energy aren't the totality of value stocks," Rex added as a caveat. "I believe we'll see that industrials are the real value play. Inflationary pressures show there needs to be increased capacity worldwide, and this sector is ripe to deliver real alpha for the foreseeable future as the world scrambles to add that production capacity."
Outside of JPMorgan Chase (JPM) and Goldman Sachs (GS) , each of which was hit by disappointing earnings prints, this has also been evident in the 2022 trajectory of the sector as compared to its S&P benchmark. Among these, Bank of America (BAC) , Truist (TFC) , and Morgan Stanley (MS) have been some of the safest bets despite still-modest returns.
Finally, many investors also see the current market trends tilting towards interest in undervalued healthcare stocks.
"During the pandemic, healthcare has been an ignored sector; it has neither benefited from the pandemic play nor the recovery play," Hank Smith, Head of Investment Strategy at Haverford Trust Company, told Real Money. " The sector is a value play with growth attributes."
As such, Smith sees healthcare as a perfect melding of the aspects that attracted such a high level of inflows to high-flying tech stocks, while offering the downside protection that many of these investors wish they had padded their portfolios with.
"As COVID fades from a pandemic, there will be pent-up demand for doctor visits and elective surgeries," he explained. "Companies like Becton Dickinson and Co (BDX) , Medtronic (MDT) , and Johnson & Johnson (JNJ) should benefit."
In the end, an era of rampant speculation appears to be coming to an inauspicious end. Whether it be in crypto trends, growth stock valuations, or rapidly falling NFT demand, investor appetites are clearly undergoing a swift change.
As such, while growth aspects are going to remain welcome for investors, companies unable to push for profits and sustainable business in line with their growth are likely to remain unfavored, putting investors with large positions in these names in serious peril.
As the market awaits a Fed decision on Wednesday, a modicum of caution via an embrace of value seems a prudent decision.