Fed Does U.S. Growth Stocks a Favor by Leaving Rates Unchanged

  • It's 2001 all over again for Russell 1000 growth-value ratio
  • Citigroup sees investors `more willing to hold on for longer'

The Federal Reserve’s decision to leave interest rates unchanged may reinforce stock investors’ preference for the shares of faster-growing companies, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

The chart below presents an indicator that Levkovich cited in a Sept. 18 report: the ratio between the Russell 1000 growth and value indexes, which ended last week at its highest reading since February 2001. Companies in the growth index qualify by past sales and analysts’ earnings estimates, while the value gauge is based on share prices relative to asset values.

Higher rates typically work against growth shares by causing investors to reduce the value of companies’ projected earnings and cash flows, Levkovich wrote. The Fed effectively put off any adjustment by keeping its target rate for overnight bank loans between zero and 0.25 percent last week, according to the New York-based strategist.

“Several more months of rates being kept in check may make investors more willing to hold onto these stocks for longer,” he wrote.

Investors may demonstrate a similar willingness with shares of smaller U.S. companies, the report said. This hasn’t been the case so far in the second half, based on the relative performance of the Russell 2000 Index.

The Russell 2000, consisting of companies with a median market value of $735 million, dropped 7.4 percent from the start of July through yesterday. The indicator fared worse than the Russell 1000 Index, whose median value is $7.05 billion. The Russell 1000 fell 4.7 percent for the period.

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