Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. However, VUG allocates 45.5% of its weight to tech and consumer discretionary names.
“Vanguard’s growth ETF has climbed 5.5 percent since Donald Trump’s Nov. 8 election, while its value fund has jumped more than 8 percent. Investors have taken note, sending nearly $215 million a day to value-oriented ETFs with more than $2 billion in assets, compared with just $53 million for their growth-focused counterparts,” according to Bloomberg.
Weighing on the value outlook, the Federal Reserve may still hike interest rates, and energy companies, commodity producers and other firms dependent on emerging markets are vulnerable to losses if rates rise. Additionally, there is no guarantee that a reflation trade benefiting value stocks will develop, especially with the consumer price index showing tepid increases and overall inflation still stubbornly below the Fed’s 2% target.
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Tom Lydon’s clients own shares of AAPL, GOOG, AMZN and FB.