The Move Toward Value Continues to Make Sense
The fact that growth styles have lagged for several weeks now is having a meaningful effect on the relative year-to-date performance of various areas of the market. The broad U.S. equity market is still trading within 3% to 4% of its recent all-time high, but certain areas of the market are down much more sharply. U.S. small caps are down 8%, Internet companies are off 18% and the biotechnology industry has lost 22% since the recent market high.
Some of these declines can be attributed to stretched valuations. The Nasdaq Biotechnology Index, as an example, is currently trading at prices that are 8X sales, compared to less than 2X for the broader market. The selloff in growth and momentum stocks is also being exacerbated by what appears to be heavy selling of these names by hedge funds. Given these trends, we continue to believe investors should emphasize value styles of investing, a strategy that has paid off in recent weeks.
With Rates Likely to Stay Low, Investors Are Stretching for Yield
Although we continue to believe rates are likely to move modestly higher over the course of the year, so far the opposite has occurred in 2014. Part of the downward drift in Treasury yields can be attributed to investors moving into safe-haven assets as part of an overall sentiment of heightened risk aversion. But an additional factor that has kept yields low is diminishing fears over an imminent rate hike by the Federal Reserve.
In the immediate aftermath of last month's Fed meeting, there was a sense that the Fed might be planning to raise the fed funds rate earlier than previously anticipated. Last week's release of the minutes from the Fed's March meeting, however, made it clear that the central bank had no such plans. The minutes confirmed that the Fed did not intend to convey a more hawkish stance and, in fact, plans to keep rates low for some time.
Stubbornly low yields have made income tough to come by in recent years, and that has sent investors searching for yield and income wherever they can find it. While we support the idea of looking for income in new places, doing so without careful consideration of the risks can be a dangerous prospect. Recently, we have seen a few instances in which investors are stretching for yield, despite the fact that the risks may not be worth it. One recent example was an auction for Greek bonds that was highly oversubscribed and garnered much more investor attention than could have been imagined during the recent height of the European debt crisis.
For those investors who are looking for additional yield, we think there are better alternatives to stretching too far for yield and ignoring risks. While there are no absolute bargains in fixed income markets today, there are some asset classes that offer good relative value, including high yield and municipal bonds. Both high yield and municipals appear fundamentally attractive, offer decent yields and the prospects for relatively low volatility.