Will the Fed Delay Value’s Turnaround?

The start of the Federal Reserve’s (Fed) rate-cutting cycle this week has several investment implications. As we wrote last week, stocks historically have done well when the central bank begins to lower rates. The rate cut boost, though, could be especially powerful for growth stocks.

To illustrate how growth stocks might get a lift from the Fed, we can look at how growth and value stocks performed after the Fed started previous rate-cutting campaigns. As you can see in the LPL Research Chart of the Day, Fed May Delay Transition to Value Leadership, growth has done quite well relative to value after those initial Fed rate cuts in the absence of a recession.

 

When those cuts came around recessions (not our expectation this time), growth-value has been a pitched battle. Thank you to our friends at Ned Davis Research for their help with this analysis.

“Despite the recent strength in growth stocks, we would still suitable recommend investors considering tilting equity allocations slightly toward value because of the duration and magnitude of the growth rally,” noted LPL Chief Investment Strategist John Lynch. “However, growth stocks may get a boost from the Fed and are enjoying strong momentum, which suggests keeping a healthy allocation to both value and growth stocks.”

We can also see in the chart that in the historical non-recession scenarios, growth stocks started to outperform on average about nine months before the rate cuts. Growth stocks started their latest run of outperformance in November 2018, which may signal recession is less likely.

We’ll examine other investment implications from the Fed’s likely rate cut in this week’s Weekly Market Commentary, due out later today.

IMPORTANT DISCLOSURES

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

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Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers incorrectly anticipate changing conditions.

This Research material was prepared by LPL Financial, LLC.

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