Analysts Are Worried About the “Other” Inversion Taking Place

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There’s been another inversion. This time, however, it’s not the yield curve.

Instead, stocks inverted. The iShares Edge MSCI USA Value Factor ETF (NYSE: VLUE), which averages the market’s top value stocks, is outperforming growth-oriented funds, like the iShares Edge MSCI USA Momentum Factor ETF (NYSE: MTUM).

Both ETFs were approximately neck-and-neck in gains since early August. But yesterday, the tide shifted dramatically.

MTUM is down roughly 3.60% from where it opened on Monday, while the VLUE is up 1.60% over that same frame.

Today, MTUM is down 1.70% halfway through the trading session. A close at the current price would mark the worst day for the growth ETF since it was created in 2013.

All while VLUE continues to rise.

Long-term, MTUM is still the clear “winner”, having posted significantly higher gains than VLUE over the last 5 years. MTUM is up 130% since 2014 while VLUE only rose 70% by comparison.

But that’s how it’s supposed to work; growth stocks should be growing faster than value stocks in a bull market.

However, this week’s decline is causing some analysts to think that MTUM (and as a result, growth stocks) peaked last Friday. Despite a scheduled October meeting between the U.S. and China, the trade war is by no means over.

Should uncertainty arise yet again, investors may switch to value stocks entirely – something that we could be witnessing the genesis of right now.

“The rotation, despite it being a positive signal in terms of investor macro sentiment, is probably a net negative for the overall SPX in that super-cap tech will likely be caught up in the selling and these stocks dominate the index weighting,” wrote Adam Crisafulli, executive director at J.P. Morgan, in a note.

Crisafulli raises an interesting point – that a “value reckoning” could be upon us.

Yesterday, seven of the S&P 500’s best-performing stocks – which have valuations that are much higher than the index average – got absolutely hammered. That list includes the likes of Advanced Micro Devices (NASDAQ: AMD) and MarketAxess Holdings (NASDAQ: MKTX), two growth giants that led the way in 2018.

By comparison, the S&P 500’s worst performers for the year – including Nektar Therapeutics (NASDAQ: NKTR) and Concho Resources (NYSE: CXO) – are on a tear, rising 13.80% and 9.30% respectively over the last two days.

So, are investors finally wising up to value-based investing? It doesn’t seem so. They had no problem buying-in at all-time highs for 10-years straight.

Instead, the market may simply be preparing for the Fed to drop rates further. The major indexes are getting nervously close to record setting highs, and if interest rates keep falling, slower-growth tech, financial, and oil stocks could see significant gains.

It’s something that caught the attention of Mad Money’s Jim Cramer on Monday.

“People seem to believe we could see some progress in the trade negotiations with China,” he said. “Personally, I’m skeptical […] but hope springs eternal. And, on top of that, there’s a belief that the Federal Reserve has no choice but to cut interest rates after Friday’s not-so-hot employment number.”

Whether a rate cut actually happens or not could be a deciding factor in the reality of a complete “value flip”. If the Fed holds off, though, investors seem likely to head right back into their favorite, good ol’ fashioned growth stocks.

Because if there’s anything we’ve learned over the last decade, it’s that value stocks make us feel safe.

But growth stocks are the ones that fund early retirements.

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