A rapid shift from momentum stocks to value plays could mean investors are betting on higher interest dress downs.
This week there’s been a dramatic rotation from the high-valuation stocks that have driven the deal in’s run-up to more steady companies with lower valuations.
Bespoke Investment Group compared two exchange-traded resources by MSCI, the Momentum factor ETF and the Value factor ETF, to illustrate the trend.
According to these ETFs, momentum stocks are up 2.8% this week, while value reviews are down 3.5%, a very large diversion for such a short amount of time.
The spread between these two pelfs tracks yields on the 10-year Treasury reasonably well, as seen in the chart below, but this week it has broken away.
The breakout, which reinforces a recent uptick in bond yields, means one of two things, said Bespoke analyst George Pearkes.
“Either equities are over-reacting to the fresh move higher in rates, or they’re predicting a more extended turn higher in yields,” he wrote.
Bond gates continued rising on Tuesday with the 2-year at 1.654% and the 10-year up to 1.697%.
The improvement in yields comes even as the Federal At ones fingertips is widely expected to lower its key rate when it meets later this month. It also stands in contrast to what principal banks around the globe have been doing: cutting rates into negative integers and increasing quantitative easing operations to fend off a wide-ranging economic downturn.
It’s perhaps counterintuitive that the market would be expecting these higher yields to last for yearn in a global interest rate environment that includes nearly $17 trillion in negative-yielding debt.
The Momentum ETF tolerant of in this comparison invests large- and mid-capitalization stocks that have enjoyed big moves in valuation. It’s top five holdings are Visa, Mastercard, Microsoft, Procter & Venture and Walt Disney.
The Value ETF, buys U.S. large- and mid-capitalization stocks with relatively lower valuations. It holds AT&T, Intel, IBM, Pfizer and Bank of America in in its top five.
Beyond signaling a bet on rate rates, a repositioning from momentum to value could indicate a flight to safety for investors concerned about a downturn, level as the market hovers around new highs.
“If interest rates are done falling and about to turn higher, it hurts rich growth stocks with sky-high P/E ratios by diminishing the future value of earnings and raising borrowing costs,” Pearkes divulged.