Now is when value really Shines

11/30/-1  Author: CBS Market Watch, Feb 17, 2017

By Mark Hulbert Market Watch February 17, 2017

CHAPEL HILL, N.C. — If you’ve ever wanted to tilt your portfolio toward value stocks, the next 75 days may be your best chance over the next four—and maybe eight—years.

I’m referring to out-of-favor stocks that are trading for low prices relative to their companies’ underlying net worth. They are to be contrasted with issues at the opposite end of the spectrum—so-called growth stocks which are very much in favor, sporting high ratios of price to underlying value.

Value’s historical advantage over growth is well known, of course. But a just-released study found this so-called value premium is especially strong in the first 100 days of a new president’s term in office. In fact, the researchers found, it is more than 10 times stronger in that 100-day period than it is on average the rest of the time.

And since we won’t be in another first 100 days of a new president’s term until at least January 2021, and possibly not until January 2025, you don’t have any time to lose: The first 100 days of President Donald Trump’s term ends on April 30.

This new study was conducted by Kam Fong Chan, a senior lecturer in finance at the University of Queensland in Australia, and Steve Gray, a professor of finance at that same institution. Upon analyzing the value premium in the U.S. since 1946, the researchers found it averaged 8.0% annualized during the first 100 days of a new president’s term, in contrast to just 0.55% the rest of the time.

Why would the value premium be so strong right as a new president takes office? The researchers theorize that it traces to the “pronounced political uncertainty” that exists during a new president’s first 100 days in office. That’s when no one knows whether the new president will “uphold or renege on [his] earlier campaign promises,” as Chan put it in an email, or whether the policies that get adopted will have the intended effect.

This uncertainty disproportionately affects value stocks, the researchers continue theorizing, since it is harder for them “to quickly and effectively adjust their operations according to the changing landscape of the political environment.” As a result, investors require a greater return on value stocks to compensate them for the greater risk and uncertainty.

As evidence for their theory, the researchers point to the much smaller value premium during the first 100 days of a president’s second term. There is far less uncertainty than at the start of a new president’s term, and—sure enough—during such periods the value premium has averaged just 1.2% annualized—versus 8.0% during the first 100 days of a new president’s term.

Note carefully, however, that the value premium has yet to kick in this time around. Though the iShares S&P 500 Value ETF IVE, +0.66% has equaled the 3.4% return of the S&P 500 SPX, +0.54% itself since Jan. 20, it has lagged the iShares S&P 500 Growth ETF IVW, +0.47% by 0.4 percentage points. But that isn’t necessarily inconsistent with the historical record. On average, as you can see from the accompanying chart, the value premium at the start of past new presidents’ terms hasn’t really begun to kick in until around the 50th day of the new term—early March, in other words.

For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email moc.sgnitartrebluh@kram

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