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Rotation to Value Here to Stay as Fed Desperate to Vanquish Inflation Boogeyman

Stock MarketsJan 15, 2022 06:45AM ET
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© Reuters.

By Yasin Ebrahim

Investing.com – The rotation to value from growth stocks has staying power as the sector can count on a powerful ally: A Federal Reserve desperate to rein in inflation.

The Invesco S&P 500 Pure Value exchange-traded fund has racked up gains of about 7% this year, while S&P 500 Growth Index is down about 5% year to date fuelled by bets a rising interest rate environment will hurt sectors of the market with longer-term cash flow horizons like tech, or growth stocks.

Unlike previous rotations to value, which just last year proved to be fleeting, the current rotation has staying power as the Fed’s “narrative has changed dramatically,” Johan Grahn, Head of ETF Strategy at Allianz told Investing.com in an interview earlier this week.

In the space of a few months, the Fed has moved on from “not even thinking about thinking about raising rates,” ditched “transitory” from its inflation vocabulary, and laid out the red carpet for policy normalization.

“Last year, the Fed was talking about potentially taking a little action in 2022, but it was really thinking about only doing something in 2023. But now the Fed is signalling that we're going to do everything we can as soon as we can,” Grahn added.

“The rotation into value is more likely to stick around than it was last year, based on what the Fed is signalling and what we're seeing in the bond market,” he added.

Hot debate has broken out on Wall Street about what exactly the new normal for the Fed will look like. A rate hike in March followed by several more hikes to take the Fed funds terminal rate to 2.5% by 2024? The start of quantitative tightening, or a balance sheet runoff starting in July?

While the guessing game on “normal” will continue for some time, there is no doubt that the Fed is having to play catch up, and may have to move faster on policy tightening as its tools are blunt to combat supply-driven inflation.

“Inflation is going to be hanging over our heads for a longer period of time and I think that the Fed is going to have no choice but to continue to move their rates up,” according to Grahn.  “I happen to believe that they might move in a faster pace.”

“The consensus now is for rate hikes of about 25 basis points per quarter, but at some point, I wouldn't be surprised if they said we're going to hike by 50 basis points ... that will trigger a quick rotation in value again.”

Rotation to Value Here to Stay as Fed Desperate to Vanquish Inflation Boogeyman
 

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Comments (19)
Ralph Dary
Ralph Dary Jan 16, 2022 4:47PM ET
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hummm. a great time, since the fed. is telegraphing its move/moves. as a former fed watcher/active-listener, its latest move was a snore to me. I'll bet the "shorts" nodes fried a circuit or two given proprietary systems, (hi, citi; hi GS. Moshi- moshi Sumitomo, WOOF, Barkley's; and parlay THIS Societe Generals) some people are going to be buying smaller hats for a very cold Winter! I'm just chillin...and...is the Fed.Wire System STILL being used? god, I'm giving away my age am I not. ciao mia bella--bona for tuna. (chumps)
Marco cuevas
Marco cuevas Jan 16, 2022 7:11AM ET
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Sale on frowth stocks? yes please
William Smith
William Smith Jan 15, 2022 7:52PM ET
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Read am article a few days ago that charted stock sectors back to 1980 when during times of the Fed raising rates. Inflation varied during every state increase period. The biggest sector winner EVERY time? Technology.
Daniel Lu
Daniel Lu Jan 15, 2022 6:44PM ET
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Think about what rapid rate hike will impact a lot of people who have house loans and they don’t have enough pay raise
New Jazenevd
New Jazenevd Jan 15, 2022 6:44PM ET
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Most house loans, aka mortgages, have fixed rate. It cannot be affected by future rate changes after the loan initiated.
Robert Cox
Robert Cox Jan 15, 2022 6:44PM ET
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Unless they went with an ARM.
Dave Jones
Dave Jones Jan 15, 2022 6:16PM ET
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they will never raise rates
Andrew Ulferts
Andrew Ulferts Jan 15, 2022 3:11PM ET
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I have a value stock for you that is likely to do 10-30x from the current spot price in the next 1-3 years. ICD. Impressively undervalued, but interest is returning to the drilling sector by institutions. Very low risk. Book value is $27.48, spot price is $4.20. Math is fun.
Javier Escamilla
Javier Escamilla Jan 15, 2022 12:06PM ET
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So buy tech next week? Got it!
Dave Jones
Dave Jones Jan 15, 2022 12:06PM ET
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perfect!
Barani Krishnan
Barani Krishnan Jan 15, 2022 11:52AM ET
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Our author wrote a story that's pretty topical and articulates well that the Fed made a mistake at the wheel and is trying to correct that, and the manifestation of that could be a protracted rotation to value in stocks. I can't for the life of me find anything wrong in that theory, based on the evidence before us. You can disagree, of course (I see that some of you don't, although you also don't think this will drag for too long; that's fine, it's your opinion and one that I respect). But there's no reason to target our author because the facts in the story speak for themselves.
New Jazenevd
New Jazenevd Jan 15, 2022 10:39AM ET
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Talking about present market situation, this is called consolidation and it is a pretty normal , healthy event. Some folks took profits on high-flyers once new year started. They did not do it in December by obvious tax-related reasons. The market did not drop a lot in January, good part of profits went to value stocks; this is good too. This makes the market more balanced. Going forward, possible Fed moves will likely be unsuccessful and speed up stagflationary scenario. This should be positive for some market sectors and still tolerable to some others. On the other hand, economic consequences will be outright negative, and it would be wrong to blame Fed alone for this.
William Smith
William Smith Jan 15, 2022 10:39AM ET
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Blame the massive spending Bill's Pelosi and Schumer rammed through. Those Bill's effect cost of goods, labor and all things connected to such. Inflation results.
New Jazenevd
New Jazenevd Jan 15, 2022 10:39AM ET
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William Smith  Certainly, high inflation is caused by reckless overspending, pursued by Dems.
Stan Smith
Stan Smith Jan 15, 2022 10:32AM ET
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Ridiculous...the FED created inflation due to excessive Money Printing (QE) and they are now desperate to vanquish it. Honestly?... inflation is by design and engineered intentionally by governments to inflate away all of the debt they have created and Main St foots the bill
New Jazenevd
New Jazenevd Jan 15, 2022 10:32AM ET
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Fed and government are not 100% identical entities. Specifically to your message, Fed did money printing to accommodate reckless overspending initiated by US administration and authorized by US Congress. Both the administration and the Congress are elected by people. Should be Fed alone blamed in this scheme?
Strat Afro
Strat Afro Jan 15, 2022 10:32AM ET
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New Jazenevd  The hate between the two parties is The Great Schism of The Roman Empire. 😎
New Jazenevd
New Jazenevd Jan 15, 2022 10:32AM ET
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Strat Afro  Romans actually had two parties, similar to Dems and Reps, in late republican times and no parties under Empire.
Chad RicherThanYou
Chad RicherThanYou Jan 15, 2022 10:09AM ET
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This article tells me it is time to buy tech and growth
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Samer Diab
Samer Diab Jan 15, 2022 10:09AM ET
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best thing is to put 1000 usd in each of the blue chip tech mega cap stocks like nvda, aapl, msft, googl. then dollar cost average 100 usd every month. u will be surprised how much money u will make in 5 years and more.
Chad RicherThanYou
Chad RicherThanYou Jan 15, 2022 10:09AM ET
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Samer Diab as long as interest rates stay low, yes!
Samer Diab
Samer Diab Jan 15, 2022 10:09AM ET
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even if interest rates go high. I am looking long term and not only 2022. if u had invested in nvda right before the 2008 crash and bear market 1000 usd then 100 every month , your total investment will now be 16k worth 850k. same for Apple your 16k will be 200k. check it out if you don't believe me
Strat Afro
Strat Afro Jan 15, 2022 10:09AM ET
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Samer Diab  In other words, FOLLOW THE MONEY LAUNDERERS. Agreed; If i was your age i would do it. 😎
Strat Afro
Strat Afro Jan 15, 2022 10:09AM ET
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Samer Diab  Mr. D... I can see you in the picture you're a very successful man ! CHEERS ! 😎
MO Zapata
MO Zapata Jan 15, 2022 9:45AM ET
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Seriously? I nean this authtor has been sleepiing through 1990-2019?
Barani Krishnan
Barani Krishnan Jan 15, 2022 9:45AM ET
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Sarcasm doesn't work when the facts speak for what's in the story. Everything Yasin says is indicative of what is to come: that the perma rally of the big caps that we've been seeing may be over and perhaps it's time for the Dow alone to shine instead. Yasin is wrong for saying that and citing the inflation-awakened Fed as proof? There are two types of commentators on this site: one who comments when necessary and with opinions that are relevant and material; and the other who puts in an appearance simply to try and look "clever". I don't have to say which constituency you belong to.
Mitchel Pioneer
Mitchel Pioneer Jan 15, 2022 9:42AM ET
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The US stock "market" is the greatest financial fraud in history.  Charles Ponzi would cry tears of joy if he could see the ultimate incarnation of his scheme in action.
Benjamin McIntire
Benjamin McIntire Jan 15, 2022 9:42AM ET
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fRaUd
Arthur Hulme
Arthur Hulme Jan 15, 2022 9:18AM ET
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Roatation into energy… $XLE
New Jazenevd
New Jazenevd Jan 15, 2022 8:21AM ET
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The main reason for “rotation to value”, which happened last 2 weeks, is uncertainty about Fed actions to fight inflation. No certainty exists now regarding both timing and results of bond purchase termination and/or rate hikes. When situation gets uncertain, investors tend to look for “safe havens” and the latter term often coincides with “value stocks”. At least, it coincides this January so far. Once certainty returns, some funds will return to more habitual investment path.
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Barani Krishnan
Barani Krishnan Jan 15, 2022 8:21AM ET
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Read his comment above and my response.
Barani Krishnan
Barani Krishnan Jan 15, 2022 8:21AM ET
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Our author wrote a story that's pretty topical and articulates well that the Fed made a mistake at the wheel and is trying to correct that, and the manifestation of that could be a protracted rotation to value in stocks. I can't for the life of me find anything wrong in that theory, based on the evidence before us. You can disagree, of course (I see that you don't, although you also don't think this will drag for too long; that's fine, it's your opinion and one that I respect). But there's no reason for MZ to target our author because the facts in the story speak for themselves.
New Jazenevd
New Jazenevd Jan 15, 2022 8:21AM ET
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Barani Krishnan  This is an internet message board, which will stay visible for few hours maybe. Paying extra attention to every opinion around hardly justifiable. Also, every person, posting an article on internet, can expect to meet various reactions.
Barani Krishnan
Barani Krishnan Jan 15, 2022 8:21AM ET
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New Jazenevd  That's an interesting response from you, given that you spare little energy yourself in countering any observation that challenges your opinion. If I remember correctly from our last exchange, you kept going till you had the last word and we both respectfully signed off. And by the way, I've only made an observation right at the top; one to MO Zapata and then to you. I think that hardly befits the description that you've made of me, that I'm "paying extra attention to every opinion" because there are so many others here that I didn't react to. Respectfully, yours.
New Jazenevd
New Jazenevd Jan 15, 2022 8:21AM ET
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Barani Krishnan  I am entitled and feel obliged to reply to folks addressing me directly. Going to others threads is optional. Also, my preceding reply in this thread was not actually about your specific reactions. This was more about my reactions.
Sol Wein
Sol Wein Jan 15, 2022 8:20AM ET
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Rotation should be into precious metals!
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Aleksandr Radchenko
Aleksandr Radchenko Jan 15, 2022 8:20AM ET
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if people buy raw materials such as copper or oil, then this will lead to increased inflation. if people buy useless precious metals like gold, then this does not affect inflation in any way.
New Jazenevd
New Jazenevd Jan 15, 2022 8:20AM ET
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Aleksandr Radchenko  Are you serious, buddy? Inflation starts and ends by reasons substantially more serious than few folks buying gold. Also, people or, better say, entities buy copper or oil, because they need in them, not because they want to increase inflation.
Aleksandr Radchenko
Aleksandr Radchenko Jan 15, 2022 8:20AM ET
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yes, besides these people who need copper and oil, there are other people who buy oil in order to sell it at a higher price. besides, we have a cartel. the purpose of the cartel is to manipulate the price of oil. however, my advice to buy precious metals is sarcasm. you did not understand? you will lose money if you buy gold, but it will help society resist inflation. thus the purchase of gold is an honor and nobility, self-sacrifice for the sake of people.
New Jazenevd
New Jazenevd Jan 15, 2022 8:20AM ET
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Aleksandr Radchenko  Buying gold will not help society, for sure. Also, “oil cartel”, if you mean OPEC, does not buy oil. It sells oil.
New Jazenevd
New Jazenevd Jan 15, 2022 8:20AM ET
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Aleksandr Radchenko  On the other hand, I like your sarcasm. Take it easy and good luck.
Martijn WN
Speculeerbeer Jan 15, 2022 8:10AM ET
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When retail has bought plenty of value stocks at all time highs, they will rotate back to growth. That's how it works. During "rotations" like this, I usually take a contrarian position. Plenty of good growth stocks are now available at proper valuations, and it will only get better.
New Jazenevd
New Jazenevd Jan 15, 2022 8:10AM ET
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Some value stocks have reasonable valuations and do not trade at all time highs at the moment.
Empire Destroyer
Empire Destroyer Jan 15, 2022 8:10AM ET
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Manipulators always win... not sure why these big investment banks and hedge funds get paid so much just to manipulate the market. It's like they always win win situation regardless what happens. Greed, corruption, too free a market and capitalism will always make sure the ones with money and influence always win
Martijn WN
Speculeerbeer Jan 15, 2022 8:10AM ET
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True, but generally speaking, I think it's fair to say that "value" will be heavily inflated in the short run, whereas many perfectly fine growth stocks have lost more than half of their value in a matter of weeks. I see them as bargains, if you have a long term view.
New Jazenevd
New Jazenevd Jan 15, 2022 8:10AM ET
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Martijn WN  Yep, every growth stock can transform to value and vice versa. Take Intel, for example.
Strat Afro
Strat Afro Jan 15, 2022 8:10AM ET
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Martijn WN  Warren says,'' 100 years A lot can be done ''
New Jazenevd
New Jazenevd Jan 15, 2022 7:53AM ET
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Yes, rotation to value was tangible in preceding two weeks. On the other hand, this is too early to say whether this is a new trend or just fund re-balancing.
MK MK
MK MK Jan 15, 2022 7:23AM ET
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What the misleading article. Next week you will witness rotation to growth junk ))
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SAKTHIVEL sakthivel
SAKTHIVEL sakthivel Jan 15, 2022 7:23AM ET
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im sakthivel
Rob Whalen
Rob Whalen Jan 15, 2022 7:23AM ET
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Tech earnings in 2 weeks n banks already missed - where do u think you can trust ur $ then…?
Empire Destroyer
Empire Destroyer Jan 15, 2022 7:23AM ET
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tech will be fine. With Omnicron in Nov/Dec then drive to online continued when we expected not to. Value stocks will be down as they forecasted an further opening up in Q4 but we didn't get that. Banks should earn less anyways, they win either way and to compete they paying their staff more than ever
me ish
me ish Jan 15, 2022 7:23AM ET
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yeah exactly - the media never, never suggest going to cash - as the media are owned by the market manipulators - we're about to see a market wide sell off on Monday, so cash is king - never mind rotation - all stocks are overvalued and give it a few months and you'll be able to buy at far better values - value and growth very soon - let the bubble deflate first - rotating to value will still mean you're going to lose a large percentage of your wealth
Empire Destroyer
Empire Destroyer Jan 15, 2022 7:23AM ET
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cash is king but if it's sitting around while we wait a few months to buy stocks at better value then inflation at 15% really, means cash worth less in a few months. Hence the dips keeps getting bought up especially by retailers
 
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