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And it could have huge implications for how you invest your money going forward.
Long gone are the days of near-zero interest rates and unlimited easy money from the Federal Reserve, it seems. The Fed has already all but promised higher rates. And market pricing indicates the probability of five to seven interest rate hikes this year alone.
This belief is already impacting bond markets. Yields on two-year Treasury notes, which are very sensitive to Fed policy, have skyrocketed from 0.2% just six months ago to 1.2% today.
That means short-term yields have increased sixfold in just six months. And that’s before the Fed has even made its first rate hike! The benchmark 10-Year Treasury note yield has also soared, from 1.2% six months ago to above 2% last week.
This could be significant for Americans; the 10-year yield has significant influence on the pricing of home mortgage loans, car loans, and small-business loans.
Impact of Higher Interest RatesMeanwhile on Wall Street, higher interest rates have big implications for how and where to invest in stocks.
Typically, higher interest rates lead to a decline in stocks’ price-to-earnings (P/E) ratios. That’s because the future cash flows from stocks get discounted when interest rates are higher, making the future value of that cash worth less in today’s dollars.
That explains why high P/E growth stocks have suffered the brunt of the selling during the recent market correction. Investors have been rotating into more undervalued stocks instead, which have been outperforming.
Over the past 12 months, for example, the high-growth, high-priced Nasdaq 100 Index is down 12.8%. Meanwhile, the undervalued S&P 500 Energy sector is up 27% over the same period.
And even after the recent move lower for the Nasdaq, the index still looks richly valued with a current P/E ratio of 31.9. And energy stocks with a current P/E of just 14 still look cheap.
Growth versus ValueIn fact, the two main styles of growth and value investing have a long history of moving in opposite directions from each other and then playing catch-up.
As you can see in the chart above, growth stock versus value stock outperformance tends to run in long trends, often lasting many years. Growth had the lead over value for the past decade, but now it seems that trend may be just starting a major shift in favor of value stocks that could continue for some time.
The catalyst for this trend change has everything to do with the Federal Reserve’s plan to begin raising interest rates, as you can see in the chart below.
Historically, when the Fed starts tightening, value stocks lead the way in terms of performance. During most tightening cycles since 1986, value stocks outperformed by about 7% per year relative to the overall stock market!
And sure enough, since December 2021, value stocks as measured by the S&P 500 Pure Value ETF (RPV) are up 9.4%, while growth stocks as measured by the S&P 500 Pure Growth ETF (RPG) are down 15.3%.
In other words, value stocks are winning the most “style points” with the market right now. And with that in mind, it’s a great time to use our TradeSmith Finance tools to find the healthiest, highest-rated value stocks in the market.
Let Our Screener Do the WorkOur Screener tool helps you find stocks based on criteria you select to best fit your investing goals. You can also screen for stocks that meet certain investment styles, including value or growth.
Plus, once you build a screen that meets your needs, you can save it to quickly run again and again. And you can use the results to help you build a stock portfolio, or as a source of individual stock ideas.
Here’s how to go about it.
On Monday, I ran a screen for stocks that meet our Ideas by TradeSmith Value strategy and that currently have a Health Indicator status in the Green Zone.
I added that every stock must also be in an uptrend. Too many stocks recently have fallen into a downtrend, so I might as well screen them out and look for only the best performers.
Finally, I wanted to narrow the list to stocks that pay a minimum cash dividend of 1.5%. That’s because stocks that pay solid and growing cash dividends also tend to perform well when interest rates are on the rise.
Below is a screenshot of the steps I followed to create this screen. TradeSmith subscribers can easily copy this screen and save it for themselves.
And here’s how to create this screen step by step:
- Select stocks in the Green Zone.
- Select only stocks trending up.
- Select stocks that have qualified for the Value strategy within the last 30 days.
- Select stocks with a 1.5% or more dividend yield.
As a member, you can mix and match different indicators and look for more or even fewer stocks that make the grade. With TradeSmith’s Screener tool, you have plenty of ways to identify new opportunities for your portfolio.
With interest rates on the rise, value stocks have already grabbed the pole position in terms of market performance. You can take advantage of our valuable screening tools to find stocks with the best “value style points” right now.