Connect with us

Infographics

Rising Rates: Why Value Stocks Have Outperformed

Published

on

This infographic is available as a poster.

Value Stocks

Value Stocks

This infographic is available as a poster.

The Benefits of Value Stocks in Rising Rate Environments

As investors flock to safety, value stocks have outperformed growth stocks year-to-date amid economic turbulence and rising interest rates.

Owing to their strong fundamentals and cash flows, value stocks may be returning into favor.

In this infographic from New York Life Investments, we illustrate why value stocks offer opportunities in rising rate periods.

Recent Performance

In a matter of two years, the Ukraine war, supply chain shocks, and COVID-19 have led inflation to multi-decade highs.

Amid these complex struggles, value stocks have outperformed significantly.

  • Russell 1000 Value Index: -1.1%
  • Russell 1000 Growth Index: -14.1%
  • S&P 500: -8.4%

As of April 14, 2022

With higher inflation predicted for the medium term, value stocks may be staging a comeback.

As investors look to de-risk their portfolios, many are turning to value stocks, thanks in part to their historical outperformance during inflationary and rising rate periods.

Value vs. Growth: Key Characteristics

As a quick refresher, here are the key distinctions between value stocks and growth stocks.

CharacteristicValue InvestingGrowth Investing
Defining FeaturesCompanies with stronger cash flows, steady income, priced below intrinsic value.Companies with lower cash flows, low (if any) income, strong earnings growth potential.
ValuationUndervalued (low P/E ratios)Overvalued (high P/E ratios)
DividendsMore commonLess common
VolatilityLowerHigher
SectorsFinancials, Energy, Healthcare, IndustrialsTech, Communications, Consumer Discretionary

Cyclical sectors such as financials and energy often benefit when prices increase after an economic contraction.

Since companies earn money in different ways, it is often useful to compare price-to-earning (P/E) ratios within a sector. A P/E ratio is a metric for valuing a company, where a company’s stock price is divided by its earnings per share.

An overvalued company in the tech sector may have a P/E ratio of 100, while the S&P sector average is 24. By contrast, an undervalued healthcare company may have a P/E ratio of 14, lower than the S&P sector average of 16.

When a company is undervalued it means that it’s trading below its intrinsic value.

Value vs. Growth: Performance

Looking back, the previous decade saw the worst performance for value in the last 90 years.

On average, growth outperformed value by 7.8% annually since 2010. However, looking at 10-year periods, value has outperformed growth over every decade since the 1940s.

DecadeValue Outperformance
1930s-0.5%
1940s10.8%
1950s5.6%
1960s4.2%
1970s8.1%
1980s7.4%
1990s0.7%
2000s8.0%
2010s-2.6%

Average annual performance of Fama and French (“HML”) value factor by decade.
Source: Fama & French via Mercer (Mar 2021)

Now, against economic uncertainty and other structural shifts, the growth and value divergence is beginning to change for the first time in over a decade.

What is Driving Value Stocks?

On a broader level, the following forces have driven outperformance in value stocks and growth stocks.

 Value InvestingGrowth Investing

Broad Market Factors
  • Rising interest rates
  • Market recovery
  • Inflationary environment
  • Long-term earnings track record
  • Low interest rates
  • Bull market
  • Disinflationary environment
  • Rising corporate earnings

So how do these apply today?

In an inflationary (and rising rate) period, current earnings become more valuable and future earnings become less valuable. Typically, “value stocks” are assessed based on their current earnings while “growth stocks” are valued on their future earnings.

Consequently, inflationary periods have tended to favor value stocks and deflationary periods have tended to favor growth stocks. When prices are climbing, companies with actual earnings are potentially better positioned to increase prices and retain profit margins.

At the same time, it is important for investors to avoid value-traps, which are companies trading below value that are in financial duress. To help mitigate this challenge, active investment managers can help identify the appropriate companies.

Sign of the Times

It’s worth noting that this isn’t about value vs. growth. Instead, different styles have performed better at different times. Of course, it’s important for investors to consider a number of variables for their portfolios:

With these in mind, investors can implement the best strategies to help achieve their goals.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Infographics

Visual Guide: The Three Types of Economic Indicators

From GDP to interest rates, this infographic shows key economic indicators for navigating the massive U.S. economy.

Published

on

View the high resolution version of this infographic. Buy the poster.

A Visual Guide to Economic Indicators

Economic indicators provide insight on the state of financial markets.

Each type of indicator offers data and economic measurements, helping us better understand their relationship to the business cycle. As investors navigate the market environment, it’s important to differentiate between the three main types of indicators:

  • Leading
  • Coincident
  • Lagging

The above infographic from New York Life Investments shows a road map of indicators and what they can tell us about the economy.

What’s Ahead: Leading Indicators

Leading indicators present economic data that point to the future direction of the economy like a sign up ahead. Here are three examples.

1. Consumer Confidence Index

This key measure indicates consumer spending and saving plans. When the index is above 100, consumers may spend more over the next year. In December, the index jumped to 108 up from 101 in November. This was in part due to lower inflation expectations and improving job prospects.

In the December survey, 48% indicated that the job market remained strong, highlighting the strength of employment opportunities and likely influencing sentiment towards spending in the future.

2. ISM Purchasing Managers Index

The ISM Purchasing Managers Index indicates expectations of new orders, costs, employment, and U.S. economic activity in the manufacturing sector. The following table shows how the index is broken down based on select measures:

IndexNov 2022
Oct 2022Percentage
Point Change
Direction
Trend (Months)
Manufacturing PMI49.050.2-1.2Contracting1
New Orders47.249.2-2.0Contracting3
Employment48.450.0-1.6Contracting1
Prices43.046.6-3.6Decreasing2
Imports46.650.8-4.2Contracting1
Manufacturing SectorContracting1

For instance, in November the index fell into its first month of contraction since May 2020. Falling new orders signal that demand has weakened while contracting employment figures indicate lower output across the sector.

3. S&P 500 Index

The S&P 500 Index indicates the economy’s direction since forward-looking performance is factored into prices. In this way, the S&P 500 Index can represent investor confidence as the index often serves as a proxy for U.S. equity markets. In 2022, returns for the index are roughly -20% year-to-date.

Current Conditions: Coincident Indicators

Coincident indicators reflect the current state of the economy, showing whether it is in a state of growth or contraction.

1. GDP

GDP indicates overall economic performance. Typically it serves as the most comprehensive gauge of the economy since it tracks output across all sectors. In the third quarter of 2022, real U.S. GDP increased 2.9% on an annual basis. That compares to 2.7% for the same period in 2021.

2. Personal Income

Rising incomes indicate a healthier economy and falling incomes signal slower growth. Personal income grew at record levels in 2021 to 7.4% annually amid a rapid economic expansion.

This year, U.S. personal income has grown at a slower pace, at 2.7% on an annual basis as of the third quarter.

3. Industrial Production Index

Strongly correlated to GDP, the industrial production index indicates manufacturing, utilities, and mining output. Below, we show trends in industrial production and how they correspond with GDP and personal income indicators.

DateU.S. GDPPersonal
Income
Industrial
Production
2022*7.3%2.7%4.7%
202110.7%7.4%4.9%
2020-1.5%6.7%-7.0%
20194.1%5.1%-0.7%
20185.4%5.0%3.2%
20174.2%4.6%1.4%
20162.7%2.6%-2.0%
20153.7%4.7%-1.4%
20144.2%5.5%3.0%
20133.6%1.3%2.0%
20124.2%5.1%3.0%
20113.7%5.9%3.2%
20103.9%4.3%5.5%
2009-2.0%-3.2%-11.4%
20082.0%3.8%-3.5%
20074.8%5.6%2.5%
20066.0%7.5%2.3%
20056.7%5.6%3.3%

*As of Q3 2022.

As the above table shows, factory production collapsed following the 2008 financial crisis, a key indicator for the depth of an economic downturn. Meanwhile, personal income sank over -3% while GDP fell -2%.

Despite economic uncertainty in 2022, industrial production remains positive, at a 4.7% growth rate, albeit somewhat slower than 2021 levels.

Rearview Mirror: Lagging Indicators

Like checking your back mirror, lagging indicators take place after a key economic event, often confirming what has taken place in the economy. Here are three key examples.

1. Interest Rates

Often, interest rates respond to changes in inflation. When rates rise it can slow economic growth and discourage borrowing. Rising interest rates typically signal a strong economy and are used to tame inflation. On the other hand, low interest rates promote economic growth.

Following years of record-low interest rates, the Federal Funds rate increased at the fastest rate in decades over 2022, jumping from 0.25% in March to 4.25% in December as inflation accelerated.

2. Consumer Price Index

This inflation measure can indicate cash flow for households. Inflation is often the result of rising input costs and increasing money supply across the economy.

Sometimes, inflation can reach a peak after an expansion has ended as rising demand in an economy has pushed up prices. In November, U.S. inflation reached 7.1% annually amid supply chain disruptions and price pressures across food prices, medical prices, and housing costs.

YearInflation Rate Annual Change
2022*7.1%2.4%
20214.7%3.5%
20201.2%-0.6%
20191.8%-0.6%
20182.4%0.3%
20172.1%0.9%
20161.3%1.1%
20150.1%-1.5%
20141.6%0.2%
20131.5%-0.6%
20122.1%-1.1%
20113.2%1.5%
20101.6%2.0%
2009-0.4%-4.2%
20083.8%1.0%
20072.9%-0.4%
20063.2%-0.2%
20053.4%0.7%

*As of November 2022.

3. Unemployment Rate

The unemployment rate has many spillover effects, impacting consumer spending and in turn retail sales and GDP. Historically, unemployment falls slowly after an economic recovery which is why it’s considered a lagging indicator. When the unemployment rate rises it confirms lagging economic performance.

Overall, 2022 has been characterized by a strong job market, with unemployment levels below historical averages, at 3.7% as of October.

On the Road

To get a more comprehensive picture of the economy, combining a number of indicators is more effective than isolating a few variables. With these tools, investors can gain more perspective on the cyclical nature of the business cycle while keeping a long-term perspective in mind on the road ahead.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Infographics

Europe’s Energy Crisis and the Global Economy

Europe’s energy crisis could last well into 2023. Here’s how the energy shock is causing ripple effects across the broader economy.

Published

on

This infographic is available as a poster.

Europe’s Energy Crisis and the Global Economy

Volatile energy prices are squeezing household costs and business productivity in Europe.

While energy prices have fallen in recent months, several factors could influence price volatility looking ahead:

  • Russia slashing energy supplies
  • Rising winter heating demand
  • Shrinking European storage facilities

In the above infographic from New York Life Investments, we show the potential impacts of Europe’s energy crisis on consumers, businesses, and the wider global economy.

1. Impact on Consumers

Energy plays a central role in overall inflation. Here’s how it factors into the consumption baskets of various countries:

CountryEnergy %
of Inflation
Total Inflation Rate
(Sep 2022)
EnergyFoodAll Items Less Food
and Energy
Germany46%9.9%4.5%1.8%3.6%
Italy42%8.7%3.7%2.2%2.8%
Japan42%3.0%1.3%1.0%0.8%
France29%5.6%1.6%1.6%2.4%
United Kingdom28%8.8%2.5%1.3%5.0%
U.S.17%8.2%1.4%1.0%5.8%
Canada15%6.8%1.0%1.3%4.5%

Source: OECD (Oct 2022). Annual inflation is measured by the Consumer Price Index.

As the above table shows, energy makes up nearly half of consumer price inflation in Germany. In the U.S., it contributes to about one-fifth of overall inflation.

Amid energy supply disruptions, U.S. winter heating costs are projected to rise to the highest level in a decade. As heating costs rise, it could impact consumer spending on discretionary items across the economy, along with other essential household bills.

2. Impact on Business

Natural gas and petroleum are key components in many industries’ energy consumption. As a result, the recent rise in energy prices is adding significant cost pressures to operations.

Below, we show how four primary sectors use energy, by source:

U.S. SectorPetroleumNatural GasRenewablesCoalElectricity
Transportation90%4%5%0%<1%
Industrial34%40%9%4%13%
Residential8%42%7%0%43%
Commerical10%37%3%<1%50%

Source: EIA (Apr 2022). Figures represent end-use sector energy consumption in 2021.

In Europe, soaring energy prices have led to production declines in energy-sensitive industries over recent months. As a ripple effect, European fertilizer production capacity has decreased as much as 70%, crude steel capacity has fallen 10%, and aluminum and zinc production capacity has sunk 50%.

In response, some companies may move production out of Europe to regions with lower energy prices. This occurred in 2010-2014 amid high European energy prices, where companies relocated to the U.S., the Middle East, and North Africa.

3. Impact on the Economy

While the energy crisis is having devastating effects on many countries, some markets like the U.S. are more sheltered from the impact. As seen in the table below, the U.S. produces virtually all of its natural gas. Figures are shown in trillion cubic feet.

YearU.S. Natural Gas
Production
U.S. Natural Gas
Consumption
Net Imports
20213531-4
20203331-3
20193431-2
20183130-1
201727270
201627271
201527271
201426271
201324261
201224262
201123242
201021243

Source: EIA (Sep 2022).

By contrast, Europe imports 80% of its natural gas, primarily from Russia, North Africa, and Norway. Not only that, natural gas imports have increased over the last decade, up from 65% of total supplies in 2010.

Meanwhile, the energy sector is seeing strong returns supported by higher oil and natural gas prices, along with key fuel shortages as Russia constricts supplies to Europe. In November the S&P 500 Energy Index was up 65% year-to-date compared to the broader index, with -17% returns.

Europe’s Energy Crisis: Looking Ahead

Given the complex geopolitical environment, Europe’s energy crisis could last well into 2023, driven by many factors:

  • Rising demand from China post-COVID-19 lockdowns
  • Lower European fuel reserves
  • Inadequate energy infrastructure in the medium-term

The good news is that European government relief has reached €674 billion ($690 billion) to cushion the effect on households and businesses.

However, this has additional challenges as increasing money supply may be an inflationary force.

Amid market volatility, investors can avoid getting caught up in short-term market movements and stay focused on their long-term strategic allocation.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Subscribe

Are you a financial advisor?

Subscribe here to get every update, including when new charts or infographics go live:

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Social

Popular