Value-Stock Rebound in U.S. Leaves JPMorgan Strategist Cautious

  • S&P 500 Pure Value/Pure Growth ratio rises from 6 1/2-year low
  • Fed policy, low inflation seen hampering sustained recovery

Value stocks have yet to reach a point where they can sustain the kind of recovery they experienced during the past month, according to Dubravko Lakos-Bujas, JPMorgan Chase & Co.’s chief U.S. equity strategist.

The chart below displays the ratio of the Standard & Poor’s 500 pure value and pure growth indexes, consisting of S&P 500 companies that best fit into each category based on earnings, sales and share prices. The ratio rose as much as 4.8 percent after dropping on Sept. 18 to its lowest level since April 2009, a month into a bull market in stocks.

“It is tempting to rotate into value” after the turnaround, Lakos-Bujas wrote in an Oct. 16 report. Yet there are two reasons why the timing isn’t right to make that kind of a move, the New York-based strategist wrote.

One is the risk that the Federal Reserve will raise interest rates in December, as JPMorgan’s economists predict. Shares of energy and commodity producers and other companies dependent on emerging markets are vulnerable to losses if that occurs, he wrote, and they fit into the value category.

The other is that a “reflation trade” benefiting value stocks fails to develop, the report said. The Fed’s preferred barometer of inflation, tied to consumer spending on items other than food and energy, has been lower than its target rate of 2 percent since May 2012. The index rose 1.3 percent last month from a year ago.

Conditions “are not yet in place” for investors to benefit from tilting their holdings toward value stocks, Lakos-Bujas wrote. Instead, he recommended buying the shares of housing-related companies, along with energy producers in the best position to weather lower oil prices.

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