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  • Writer's pictureThe San Juan Daily Star

US value stocks offer opportunities for bargain-hunters, BofA’s Subramanian says

Value stocks offer some of the most compelling valuations in the U.S. equity market after badly lagging their growth-focused counterparts this year, Bank of America Global Research equity and quant strategist Savita Subramanian said on Wednesday.

“These companies are neglected and trading at very low multiples” at present, but offer opportunities to purchase high-quality stocks at a discount, Subramanian told attendees at Morningstar’s annual investment conference.

In a keynote speech, she said that within what she views as a generally favorable market and economic environment for stocks, large-cap value is the segment “where I have the most conviction.”

Value stocks - typically shares of companies that are comparatively inexpensive on metrics such as book value or price-to-earnings - have languished this year in a market that has been led by searing rallies in big tech names such as Nvidia. The S&P 500 value index is up around 4.5% year-to-date, compared with a more than 23.5% rise in the S&P 500 growth index.

Subramanian argues the underperformance of value stocks has made them more attractively priced compared with their growth peers. The S&P 500 growth index trades at 28.3 times forward earnings, while the S&P 500 value index has a forward P/E of 15.8, according to LSEG Datastream.

Among the sectors liked by Subramanian are energy, where she says companies have become more disciplined regarding output despite higher commodity prices.

Subrmamanian also believes the dividend payouts offered by value stocks - which are typically higher than those offered by growth stocks - will make them attractive to investors. She anticipates sizable growth in dividend payout rates over the coming decade.

A year after the Federal Reserve’s most aggressive interest rate hiking campaign in four decades, the economy is in remarkably good shape - unemployment has not been this low for this long since the 1960s, real wages are rising, and GDP growth is above trend.

Wall Street, not always the Democrats’ most natural ally, seems to agree - a potentially transformative boom in tech is in full swing, equity volatility and credit spreads are historically low, and the stock market has never been higher.

So why is Wall Street’s view not shared by Main Street? Surveys consistently show Americans are pessimistic on the economy at large, and a Reuters/IPSOS poll this week showed Trump beats Biden 43% to 37% on who has a better approach for the economy.

The answer definitely has a lot to do with inflation, and probably a bit to do with political polarization widened by social media-fueled populism, misinformation and fear-mongering.

“The macroeconomic story is strong. But there is a huge disconnect between reality and people’s perceptions, which points to a lot of misinformation about the economy,” says Heidi Shierholz, the president of the Economic Policy Institute in Washington.

“It’s that one-two punch of high price levels from the burst of inflation, and misinformation,” she adds.

The effect of ‘higher-for-longer’ inflation on people’s perceptions cannot be overstated.

A working paper titled “Why Do We Dislike Inflation?” that was published in March by Stefanie Stantcheva, a professor of political economy at Harvard University, shone a bright light on the economic, behavioral and emotional damage people feel that inflation inflicts.

The paper, built on a seminal study in 1997 by Robert Shiller, found inflation is “deeply rooted in its perceived impact on (people’s) financial well-being and the broader economy,” is distributed unevenly, and exacerbates inequality.

Minneapolis Fed President Neel Kashkari told the Financial Times earlier this month that he’s hearing increasing anecdotal evidence that people would rather have a recession than high inflation - if they lose their job, they can get help from friends or family, but everyone is affected by inflation.

That idea goes against academic studies that show recession and unemployment are more painful than rising prices. Danny Blanchflower, a professor at Dartmouth College and a former Bank of England rate-setter, estimates a rise of 1 percentage point in the unemployment rate lowers well-being by more than five times as much as an increase of 1 percentage point in inflation.

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