Here’s why investors should look for value stocks

Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Senior Portfolio Manager, joins Yahoo Finance Live to explain why it’s not too late for investors to buy value stocks as well as discuss the outlook for the stock market amid the pandemic.

Video transcript

MYLES UDLAND: Joining us now to talk more about the current market setup is Andrew Slimmon. He's the managing director and senior portfolio manager over at Morgan Stanley Investment Management. Andrew, great to talk with you this morning. So let's start with what we're seeing in markets, specifically in tech. A lot of that growth momentum style continuing to get sold. How are you thinking about that dynamic in the market, given kind of the reopening trade, fears over inflation, and then in the heels of that jobs report we saw Friday?

ANDREW SLIMMON: Well, look, I-- I've been on the show before. Good morning to everyone. You know, I'm a believer that the market has-- tech growth stocks are too crowded. And given Fed policy to sit on hold, you want to be owning the cyclical value names. And that has taken a while to work, but it seems to be accelerating. And there's just too much money still sitting in the tech growth names that has to move. So I think that's, you know, that's what we're starting to see is that rotation in leadership, and it's causing money to move in motion.

JULIE HYMAN: Yes, there is definitely that rotation going on. And at times, it's pretty painful to watch. We've been talking a lot this morning about some of the big cap tech names selling off, about the arc innovations of the world selling off as well. Just want to mention we're setting up for the opening bell in about 30 seconds' time. And we're looking for another pretty steep drop at the open here, particularly for those large cap tech stocks.

And so, Andrew, as we're looking at this rotation-- you see Stance Capital there ringing the opening bell. As we look at this rotation, you're looking still at some of the value stocks, and that maybe it's not too late for you, yourself as an investor, whoever is listening as an investor, to make that rotation themselves. How should they be doing that? How should they be thinking about it?

ANDREW SLIMMON: Well, there's two very straightforward reasons I believe that. Number one is, coming out of recessions, cyclical stocks always do the best because they're the ones that get pounded in recessions. And if you look back to 2009, they absolutely rocketed off the lows. Well, they actually didn't start outperforming the growth stocks until last fall. And it was right in front of when it became apparent that a vaccine was coming, that's when the economically sensitive stocks started to rally. So there's been a lag. So they're not back to where they are relative, so it's not too late to buy them for that reason.

The second reason I think it's the case is Feds change policy. You know, if you go back, listen to what Janet Yellen-- now, she's not at the Fed anymore. But what she has said is, look, we changed policy too quickly coming out of the Great Financial Crisis. And we're not-- and Jerome Powell said, we're not going to do that again.

So I think they're going to let the economy run hot, and we're seeing that in some of these inflationary pressures. So I think there's more to go in value. And I guess the third reason, if there's a third reason, is when we look at the data, investors and-- whether retail or professional investors, they're still overweight growth stocks. They're still overweight tech stocks. They're still underweight value. So I think there's more to go here.

BRIAN SOZZI: And, Andrew, isn't part of the problem-- and you briefly mentioned this-- is now we might see a more prolonged period of inflation, and the Fed's in a bad spot. Because to your point, they have learned their lesson to not raise rates quick to combat any inflation. Isn't it-- doesn't the market have to reprice under that scenario?

ANDREW SLIMMON: Exactly. So if you think back to-- you know, talking about growth and value and equating it to the Fed, if you look back to 2009, values started to work, and then the Fed changed policy. And value rolled over, and growth, you know, in a slow growth environment, did well. And then, you know, it picked up again, and it rolled over because the Fed kept changing policy. So the economy chronically underrealized what the estimate was from the Fed in terms of economic strength, OK?

So now the Fed is saying, we're not going to guess what the economy is going to do. We're going to wait for the data. So they're going to let the economy run hot. And in that environment, I think you can have a sustained period of outperformance amongst economically sensitive stocks because the Fed is going to be a lot more patient than they were coming out of 2010.

Now unfortunately, because we all suffer from, you know, kind of recency hindsight bias, I think the bias is, well, you know, the Fed's going to have to react, and that's-- you know, my growth stocks are going to come back and value is going to roll over. So that's what worked. That was the playbook to use after 2010. I don't think it's going to work this time because the Fed is saying, we're not making that mistake again.

JULIE HYMAN: Andrew, of course, the conundrum with the Fed that, I think, people have been grappling with is, even if the Fed's going to wait, the market is not that patient, right? And that the-- you know, even if they're not going to force the Fed's hand, they're going to force the market's hand. And so even if the Fed doesn't act, isn't there that risk that those economically sensitive stocks that you're talking about are still going to get hit?

ANDREW SLIMMON: You know, I don't think so. So I really like the financials. And the reason why I like the financials is I see it as a win-win. So what you said is, hey, isn't there a risk to the market? Even if the Fed doesn't react, you know, rates could go up. Well, if rates go up, financials work. Doesn't work for tech stocks and long duration assets that have big multiples. But I think in that scenario, financials work.

Now, what happens if the Fed ultimately starts to hint that they might need to taper because, you know, if some of the commodities are getting too hot, well, I think if they taper, [INAUDIBLE] probably go up and financials work. So I think it's a win-win scenario. I am a little cautious, to your point, about some of these commodities because they're red hot. Some of these stocks are red hot right now.

And if-- you know, as you said, if the market forces the hand, there-- the steam could come out of those. So just be wary a little bit because I do think there is a chance that the Fed is right, that some of these inflationary pressures are transitory, and they may not last. And what worries me is there's a lot-- you know, people are chasing some of these commodities, and they're getting a little hot, to your point.

MYLES UDLAND: All right, interesting stuff, as always. Andrew Slimmon, Managing Director and Senior Portfolio Manager at Morgan Stanley Investment Management. Andrew, great to spend some time with you this morning. I know we'll talk soon.