Value Investing Gains Ground As Appetite For Risk Dims

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The benchmark SPDR S&P 500's ( SPY ) recent price action has had many investors jittery.

After falling below its 50-day moving average line on July 31, SPY hasn't reclaimed that gauge of financial health in almost two weeks. That's fueling analyst concerns about bearish signals in the market. While talk of a sell-off may be premature, SPY's 6% return this year lags far behind its outsized 32% gain in 2013.

The stock market research at Zacks Investment Research. "This led most investors to seek safety in so-called defensive stocks," she said.

The swing in investment styles may also reflect some profit-taking and cyclical patterns. " Investors are rotating out of last year's most profitable investment styles (small-cap and midcap growth) and are rotating into last year's laggards (midcap and large-cap value)," said W. Kirk Taylor, chief investment strategist at 1st Portfolio Wealth Advisors.

Value Has Upper Hand

As the appetite for risk wanes, value ETFs are performing relatively better than their growth counterparts. "Generally, investing in value stocks tends to be a more defensive strategy," said Ron DeLegge, chief portfolio strategist with With higher price-earnings ratios, growth stocks can involve more risk.

More evidence of a risk-averse mood: Many index ETFs outperforming SPY show a dividend or income focus. Dividend-paying companies tend to be mature and slow growing.

But investors should not completely write off last year's winners, experts advise. "It's possible that some of these shifts are temporary in nature," Taylor said. While investors may want to rebalance portfolios in light of recent market action, he added, "many technical indicators suggest a bounce in small-cap (relative to large-cap) is due, so rebalancing in stages is recommended."

Due For A Rally?

If fears that the economy is weakening prove incorrect, sectors that have excelled this year -- such as REITs and utilities -- may experience a sharp reversal, Taylor said.

As for SPY's prospects for the rest of 2014, some experts expect the market to rally. Stocks could even surpass their record highs this year, DeLegge says. "Our position is an investor should not be shorting markets that are still uptrending," he said.

Still, other asset classes may hold even more promise. "Compared to gold and long-term Treasuries, the relative performance of stocks doesn't look so fantastic," DeLegge said. He noted that even if gold prices remain flat, the uptick in M&A activity in gold mining is a good sign for the sector.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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