The capital markets don’t anticipate any more curve balls from the U.S. Federal Reserve. Another aggressive rate hike of 75 basis points was anticipated, and the major stock market indexes took it in stride, while value continued to outperform growth.
Inflation fears have certainly done a number on tech stocks, particularly during the first half of 2022 after a strong run following 2020’s pandemic sell-off. Now, investors are favoring more value-oriented names as they cycle out of growth and into the safe confines of value amid market uncertainty.
“It’s been a tremendous reversal, and it caught some investors by surprise," said Marta Norton, chief investment officer for the Americas at Morningstar. “But we think there’s room for value stocks to continue to run, given the amount of overvaluation that was baked into some of these growth areas.”
In addition to inflation, inverting yield curves in the bond market are setting off recession alarms. That should also continue to drive more investors into value in order to shore up their portfolios should a recession indeed hit.
“There are multiple factors at play,” Norton says. “But many of the current performance drivers have been friendlier to value stocks.”
Picking up Value in Bonds
When it comes to getting value exposure, large-cap equities might be the default play, but there’s also value to be extracted from bonds. The downtrend through the first half of 2022 in the bond market opened the door for value, allowing investors to pick up cheap debt at the current prices.
As mentioned, with market uncertainty ahead surrounding a recession, investors can shore up their portfolios with bond exposure. There’s value available across the bond market, whether investors want to pick up municipal bonds or get more yield with corporate bonds.
For an all-inclusive bond option that provides core exposure, investors can opt for the Vanguard Total Bond Market Index Fund ETF Shares (BND ). For advisors advocating the traditional 60-40 portfolio, BND can replace the 40% allocation to bonds with the ease of one exchange traded fund (ETF).
Overall, BND seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
For more news, information, and strategy, visit the Fixed Income Channel.