The Fed has signalled three rate hikes for 2022 and an acceleration in the taper of its asset purchase program. In a tightening environment, and as yields increase, portfolios may change in terms of asset allocation. Fundamental valuation metrics consider the impact that rates have on cash flows. Growth stocks tend to retain and reinvest earnings, whilst value candidates are usually established and more mature in nature. As such they have higher payout ratios than growth stocks. That being the case the time value of money (TVM) has a negative impact on growth stock when rates are rising and a positive impact when rates are falling. This is one of the reasons that the NAS100 has been such a strong performer over the pandemic period (rates have been extremely low). On the flip side, TVM suggests rising rates are less painful for value candidates' valuation.
Below we consider the weekly relative strength ratio of the Vanguard Growth ETF (VUG) to the Vanguard Value ETF (VTV) to assess further. The EMAs have crossed bearishly and the stochastic has turned down (red ellipses). This denotes a weakening of the numerator (VUG) relative to the denominator (VTV), which supports the TVM. If the EMAs develop angle and separation to the downside, and the stochastic makes its way to the lower quintile, a reallocation of capital is likely taking place, aligning portfolios with the tighter monetary policy.
Past Performance: Past Performance is not an indicator of future results.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.