Tomorrow, the Fed Chooses Value Stocks to Lead!
Last week, I mentioned that shifting economic cycles can lead to similar shifts in stock market leadership.
We’ve seen some signs of that recently, as the “Magnificent 7” mega-caps are starting to lose their lead when it comes to expected profit growth. The other members of the “S&P 493” are beginning to catch up – as profits increase and the market rally broadens out.
And tomorrow, we’re due for a major shift in the economic cycle: The Federal Reserve will conclude its September monetary policy meeting and is widely expected to cut interest rates for the first time this year… ending a nine-month pause in rate cuts.
In fact, Fed funds futures are now pricing in expectations for three rate cuts – of 0.25% each, or 0.75% total – by year end.
So, a new, lower interest rate cycle is almost underway. And with this new cycle starting up, investors can expect to see new stock market leadership arrive as well.
Perhaps – at long last! – it’s finally time for unloved value stocks and small-caps to shine…
As Interest Rates Fall, Look for Rising Value Stocks!
Historically, Fed rate cut cycles have been accompanied by the outperformance of value stocks over their growth stock peers, as shown in the chart below:
Over the past 35 years, during similar shifts in the business cycle, value stocks beat growth stocks 91% of the time, and by more than 20% annually (+17.1% vs. -3.6%).
Meanwhile, it pays to take on more risk when rates are falling. Historically, in these rate-lowering environments, higher-risk stocks (with high beta values) outperformed the S&P 500 two-thirds of the time – while posting average gains of 12.6% per year over the past 35 years!
For my money, that means the best fundamental value factors to focus on right now are…
- High earnings yields (AKA: a low Price/Earnings or P/E ratio)…
- Low price-to-book value metrics…
- And low price-to-cash flow ratios.
These three classic fundamental factors have been out of style lately, but appear overdue for a comeback as the Fed resumes its rate-cutting cycle.
But another potential leadership change may come based on size. In a hard pivot from recent months, smaller is usually better when interest rates are declining.
This helps explain the recent outperformance of stocks in the small-cap Russell 2000 Index, compared to components over in the big-cap S&P 500:
Over the past two months alone, small cap stocks have gained nearly 9%, easily beating the S&P 500’s gain of 5.5%.
But you ain’t seen nothing yet – as small caps should continue to shine as the Fed cuts rates.
In past cycles of lowering interest rates, small caps have gained 26.6% a year on average, compared to gains of 15.6% for large cap stocks. That’s going all the way back to 1950:
Which means now is a great time to revisit one of my favorite market-beating stock strategies here at TradeSmith: Value.
Prepare for Lower Rates with the TradeSmith Value Strategy!
Broadly, value stocks are primed to outperform growth stocks once interest rates start to fall. But that doesn’t mean you should just buy any value stock you can find. Instead, you’ll want to pick from the best of the bunch – and that’s where our Value strategy comes in.
Members with subscriptions to Ideas by TradeSmith, Trade360, and TradeSmith Platinum can find a shortlist of the top stocks that fit this strategy – and access all of our excusive strategies from one convenient page while they’re at it.
To get started, log in to your TradeSmith Finance dashboard. From the main menu bar, simply click on the Invest tab, then click Strategies in the sub-menu to enter your Strategies Dashboard:
This page displays top results and additional data for all of the TradeSmith strategies you have access to, all on one page. This includes our Value strategy, as well as Growth, the Best of the Billionaires, and many more.
If you don’t have access to this page – or if you don’t have access to a certain strategy – and would like to, simply call 888-623-0858 to speak with our Customer Care team and learn how to get access… or read on for more information.
Once you’ve opened the Strategies Dashboard, simply scroll down the page to locate the window for the ValueInvestment strategy.
TradeSmith’s Value strategy is specifically designed to identify undervalued stocks with strong fundamentals, using a multi-factor ranking system to rank stocks with attractive valuations as well as financial strength and positive price momentum.
Specifically, stocks that fit this strategy must be in the Health Indicator Green Zone – and must also pass through our proprietary filers for fundamental and technical strength.
At the left of the window, you’ll see a list of top tickers that qualify for the Value strategy:
And on the right, you’ll find the backtested performance results for our Value strategy, displayed for easy review. As you can see below, it has outperformed the S&P 500 Index nicely in recent years:
That’s impressive, considering value has been out of favor most of that time.
And with value stocks likely to swing back into favor, as history suggests they will as interest rates fall, then you can expect plenty of potentially profitable trades from this strategy in the coming months.
You can also click the arrow icons to the left or right of the strategy window to get even more details on our Value strategy (or any other strategy on this page), including entry and exit criteria, and details on the type of investor that may want to consider using the Value strategy in their own portfolio.
From the list of top ticker results, simply click on View Results > to open the TradeSmith Screener tool. The tool will automatically display results for the strategy, so you can view all the current candidates in more detail.
Bottom Line: The Fed looks set to finally cut interest rates tomorrow, and you can expect several more cuts to come in the months ahead.
That means you should be on watch for leadership changes in the stock market – and among your own portfolio holdings. Historically, value stocks typically take the lead when interest rates begin to fall, which means now is a great time to focus on our TradeSmith Value strategy when choosing your next investment.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. TradeSmith’s Value strategy can help you identify potential winners in a rate-cutting environment – but with the Fed ready to cut rates as soon as tomorrow afternoon, there’s only so much time to act.
Here at TradeSmith, we follow the data. And the data provided by our market-scanning algorithms says the market is gearing up for a major move – a move that’s coming up fast.
We’re seeing patterns line up for the first time since the ’96 tech boom… and with the market due to get its long-awaited rate cuts on top of that, we may not just see a shift in the market in the coming weeks – but the start of an incredible wealth-building trend that could play out over the next few years.
According to our data, we may not see another event like this until 2077.
That’s why TradeSmith’s CEO, Keith Kaplan, has gone online with a special presentation: He’s determined to share the warnings provided by our algorithms, and he’s even prepared to share the data and research that allowed us to identify this upcoming market shift in the first place.
You can access it all through our Trade360 tools – the same powerful tools that can get you access to TradeSmith’s catalog of powerful investment strategies.
What’s more – Keith has identified 10 stocks that are primed to rise in the wake of this major market shift. He’s calling it “The Last Melt-Up…” because it could be the last one of this type we see in the next 50 years.
Click HERE to get all the details from Keith, and make sure you’re prepared.