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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 (15)
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
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.
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
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. 😎
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 ! 😎
 
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