The great rotation to value has commenced in the stock market. And it's likely the thing that's needed if this bull market is going to continue.
A parallel rotation to value is also occurring politically. And it's likely the thing that's needed if this Republic is going to continue.
“Within the broader stock market there was a large rotation, out of growth and into cheap, or ‘value,’ shares,” writes FT.com. “Expensive shares had their worst performance against cheap ones since 2009. The other ‘factor’ popularised by academics Eugene Fama and Kenneth French – momentum – also had a terrible time. Momentum refers to the tendency of rising shares to keep going up – but they did not live up to the name. The reversal has been so large that now the highest-momentum stocks in Europe are cheaper (based on price to book value) than low-momentum stocks, according to Alla Harmsworth at Nomura, for only the third time in 25 years.”
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It’s kind of like that in politics too.
After a weekend of unprecedented violence in Chicago-- you know, a city where the politicians of told us crime is going down-- current mayor and former Obama Chief of Staff, Rahm Emanuel, has shifted from momentum himself into “values” mode.
"Every child deserves a childhood, regardless of where they live,” said Emanuel during a press conference this week according to the Chicago Tribune. “But to do that, our city and community, the neighborhoods that make up this city, cannot live by a code of silence. They have to live by a moral code…. It's whether you have values."
Getting past the fact that Emanuel and other Democrats in Chicago little value the lives of those people most affected by the violence, values help, but so would better policing.
Voters seem to agree.
A recent poll by the Illinois Observer shows Emanuel down by 8 points to a possible challenger, quite a poor showing for an incumbent. It just shows you can fool some of the Chicago voters all of the time, all of the Chicago voters some of the time, but every 50 years or so…yeah.
Since 2009, the stock market has regained everything it lost in the Great Crash, and over the last 18 months has moved to new highs.And the market has done it by valuing the most expensive, highest momentum stocks.
The only thing that mattered in this market has been the direction of earnings not the value of earnings.As long as earnings or revenue have gone up, so has the market.
In part that's because we've made money cheap.And we've also cheapened it, a distinction that is probably lost on many economists, but shows up well at the pump and at the grocery store.
A look at the broader stocks in the Russell 2000 shows that value stocks are outperforming the highfliers-- quite a change from previous periods.
In politics we have spent the last six years also valuing the most expensive, highest momentum politicians. They too have been fueled by cheap money, and thus have cheapened everything that they have touched.
The only thing that matters to the media-- and often to the public-- has been the momentum of legislation rather than the value of it.
As long as legislation, or actual laws—hard to tell the difference between the two these days -- had momentum, the stock of the politicians packaging them has gone up as well.
The twin drivers of fear and greed fuel the stock market. For a long time now greed has been in the front seat, and fear has just been a backseat driver. And despite frantic attempts by the folks at the Federal Reserve to assure the markets that money is still cheap, investors are starting to value profits as well as fear takes hold.
Simultaneously, politics has been driven by Hope and Change, twin concepts that have been supercharged by a public relations effort as slick as it has been lacking in substance.
Hope has only made a cameo appearance, with the real stunt driving being done by Corruption. Change has made no appearance at all.
The banks are all bigger, the campaigns are more about money, and $4 trillion worth of spending has failed to produce the jobs needed to sustain our recovery. If it wasn't for expensive mismanagement, the Obama administration—and Democrats in Chicago-- would have no management at all.
And as the poll numbers show for Obamacare, voters are beginning to appreciate the concept of no management at all.
For both the stock market and for the political market, these switches back to value are both healthy and also the natural order of things.
So we can only hope that those politicians who claim to value the values voter, doesn't screw things up, economically, politically, or, God bless, Providentially.
Let us pray.