The Rebirth of Value

Doug Walters, CFA

In 2020, value stocks were declared dead by many commentators. But value has come back with a vengeance in 2021, once again proving the merits of long-term thinking and evidence-based investing.

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As we approach Mother’s Day, there is much to celebrate. Thanks to the rapid rollout of vaccines in the U.S., we are able to enjoy this Mother’s Day in a way that many of us could not last year. Investors should be celebrating as well. Reopening optimism (and a little help from the Fed) has seen the stock market climb well over 40% since last Mother’s Day. That trend continued this week, with stocks notching another positive performance.

The big winner this week was value stocks. Our evidence-based approach to investing favors four primary attractive “factors” in our portfolios, one of which is value. The others are high quality, positive price momentum, and small size. These four factors have been proven by academic research and the analyses of our investment team to provided portfolios with higher returns over time. However, they do not all work all the time, and 2020 was a perfect example. Value underperformed more expensive stocks by historic proportions last year, prompting many commentators to declare the value factor to be dead. But it has been reborn in 2021. Year-to-date, value is up nearly 25%.

The lesson here is always to stay focused on the long-term. It is all too easy to suffer from recency bias and lose conviction in the face of near-term underperformance. Staying focused on the long-term is core to our philosophy, allowing us to follow the evidence wherever it leads.

266K Jobs

Investors were surprised by the anemic non-farm payrolls jobs report for April, with just 266K jobs added compared to an expectation of 975K.

Headlines This Week

Bad News is Good News again?

The U.S. added just 266,000 jobs in April, well below economists’ consensus of 975,000 jobs.
The number of jobs created in March was revised down to 770,000, which is still a big number.
These numbers will send many analysts and crystal ball enthusiasts back to the drawing board. The quick economic recovery that was anticipated may fall short, leaving expectations for inflation and short-term treasury rates in limbo.
Over the past year, the U.S. economy added 14.5 million jobs, but that still leaves us 8.2 million fewer than prior to the pandemic.
The weak number should sideline investor concerns about tapering talk from the Federal Reserves for a little longer.

Making Compromises

President Joe Biden reiterated his openness to a compromise regarding his $4 trillion investment in U.S. infrastructure and social projects like clean energy, healthcare, etc.
The $4 trillion bill is split into two pieces; Approximately $1.8 trillion is being proposed to spend on child-care and an education plan, while about $2.3 trillion is suggested for the infrastructure package.
The President is open to negotiating on corporate tax rates, which he had proposed to increase to 28% from the current corporate tax rate of 21%.
Senator Joe Manchin of West Virginia has floated the idea that he would support a 25% corporate rate and closing of some tax “loopholes” that benefit the wealthy.

Earnings Scorecard

The first-quarter earnings season is near the end, with more than 88% of companies listed in the S&P 500 index having already reported their earnings.
Thus far, the S&P 500 blended earnings grew by about 45%, with over 80% of the companies reported earnings beating their sales and earnings per share estimates.
If the earnings growth remains on the current track for the index, it will mark the highest year-over-year earnings growth since 2010.

Inflation Warming Up

April’s US Consumer Price Index (CPI) is out on Wednesday and is sure to garner some attention.

Expectations are that the 12-month rate jumped by one percentage point to 3.6% from March’s 2.6%.
Inflation has been top-of-mind for investors as it will likely dictate when the Fed will start tapering its quantitative easing program.
While inflation has risen above the Fed’s 2% target, the Central Bank has been steadfast in insisting that this period is transitory and does not require immediate intervention.

Retail Cooling Off

Numbers for April’s US Retail Sales will be out next Friday with an expectation for contraction after a strong March.

Forecasts predict a 1% growth in retail sales, contrasted with March’s 10% growth fueled by fresh stimulus given to American consumers.
While the 10% figure was great to see for the recovering economy, sustained positive growth still points to brighter days ahead.
Next week will also see the preliminary Michigan Consumer Sentiment Index released, which is expected to reach new post-pandemic highs.

Mother’s Day!

Sunday is Mother’s Day here in the U.S. We wish all our readers the happiest of Mother’s Days!

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