There are seemingly as many explanations for what’s caused the recent rotation in stocks as there are traders in the market.
But you can count Matthew Bartolini, who runs SPDR Americas Research at State Street Global Advisors, as among those unconvinced by the recent shift from momentum to value.
SPDR is the firm behind the first exchange-traded fund, the SPDR S&P 500 Fund SPY, +0.06% , popularly known by its ticker, SPY. The parent company, State Street, now manages nearly $3 trillion, and is known as one of the “Big Three” fund managers.
Of the recent rally in value stocks, which many analysts believe points to a broad market belief that there’s more room to run in the cycle, Bartolini thinks it may have been “technically-driven,” or sparked by big investors like hedge funds needing to shed risky assets, quickly, from their portfolios, as opposed to a fundamental view that this is the right strategy for the current investment landscape.
“I go back to the economic environment we’re in, where fundamentals are not overly supportive of a broad-based value rally,” Bartolini said. “Overall economic momentum is not what I would call robust. So I think the victory lap for value is a little bit early. You’ve got to wait it out a bit.”
He also points to negative-earnings-growth expectations for the third quarter, which will start to be made public in a few more weeks, against a backdrop of valuations that are “stretched relative to historical value.”
Now that the Federal Reserve has delivered a second rate cut, and economic growth is mixed, how should investors position themselves?
“I think you need to start to bolster the defensive side of the portfolio, focusing on a low-volatility strategy,” Bartolini told MarketWatch. Rather than thinking about sectors — real estate, say, or technology — Bartolini and his team advocate considering factors, or attributes like style, size, or risk.
Low-volatility factor investing can help investors mitigate risk, but if there’s a bit more room for growth in the cycle, it’s worth adding in quality and value factors as well, Bartolini said. That may include companies that have sustainable cash flows, to check the quality box, and business models that aren’t cycle-dependent, for value. “Blending them together gives you a really diversified approach that can work well in a whipsaw volatility market that still is broadly upward-trending.”
One unappreciated sector to consider might be health care, Bartolini said. He thinks valuations in that area are attractive largely because of headline risk, not fundamentals. Earnings estimates for the coming quarter look solid, as well. “I think health care is a sneaky good contrarian opportunity for investors who are willing to take on some headline risk.”
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