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Wall St. Week Ahead: May be time for growth to run out of gas

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NEW YORK (Reuters) – A return to fashion of growth stocks in 2019 helped lead the overall market out of a year-end shakeout, but another multi-year run of growth performing better than value may not be in the cards.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., February 22, 2019. REUTERS/Brendan McDermid

The S&P 500 has rallied nearly 18 percent since its Dec. 24 low. During that time the Russell 1000 Growth index has fared even better with a gain of almost 20 percent while the Russell 1000 Value index has lagged with a gain of about 17 percent.

That marks a reversal from the fourth quarter, when value outperformed as stocks nearly tumbled into bear market territory, a trend some analysts feel will return as the market grapples with several major headwinds such as Brexit and trade negotiations.

Growth investors typically search for companies that have higher profit growth and margins, while value investors look for stocks that seem inexpensive.

Shortly after the S&P hit its most recent record on Sept. 20, thanks to the outperformance by growth, especially technology stocks, the spread between the Russell 1000 growth and value indexes had surpassed the levels hit during the end of the dot-com era. The fourth quarter selloff helped that narrow but it began to widen again shortly before the new year.

“The valuation imbalance we have seen between growth and value in the largecap space … when we have seen that inflection point in the past there has been a very powerful long-term rally where value has outperformed growth and we think that is coming up,” said Phil Orlando, chief equity market strategist, at Federated Investors, in New York.

(Graphic: Historic spread between value and growth stocks – tmsnrt.rs/2V7L04a

(Graphic: Russell 1000 growth vs value spread – tmsnrt.rs/2VgekWh

In a recent note to clients, Morgan Stanley equity strategist Michael Wilson said that the stocks that got hit first and hardest during last year’s “rolling bear market” would lead the recovery this year and rally the hardest. That prediction appears to be playing out as areas such as transportation, considered cyclical value, have been among the leaders to the upside this year.

Wilson anticipated the Federal Reserve will hold off raising interest rates further and that the global economy would bottom in the first half. He favors value over growth, with a focus on cyclical over defensive stocks.

Value stocks also remain cheap relative to growth shares, with their widest forward price-to-earnings ratio spread in over a decade. And while investor worries about a recession, which helped fuel the fourth-quarter sell-off, have abated, a number of headwinds remain that could make value more attractive as market uncertainty rises.

“There are still a lot of headaches coming, whether it is Brexit, China – what is the (trade) package going to look like? – the legal stuff in Washington,” said Steve DeSanctis, equity strategist at Jefferies in New York.

The Russell 1000 Value forward PE also sits right at its long-term average of about 13.8 while the Growth index is nearly 20, well above its historic average of 17.5.

(Graphic: Forward PE of Russell Growth and Value indexes – tmsnrt.rs/2Ep2nrw)

One challenge, even though value is relatively cheap, is that financials have a heavy weighting in value indexes and a Fed pause will make it harder for those firms to grow profits.

Even though, as of the last reconstitution of Russell indexes in June, the financial services sector saw the most significant decrease in index weight in the largecap 1000 value index, it still was 29.1 percent. In the Russell 2000 Smallcap Value financials command a weighting of 40.5 percent.

“If value is going to work, it has to be financials,” said Mark Stoeckle, CEO at Adams Funds in Baltimore in an interview with Reuters.

“The one thing people were counting on in the first half of 2018 with the Fed was it was going to continue to raise rates, this (was) going to be good for banks – and not so much anymore.”

Reporting by Chuck Mikolajczak; editing by Alden Bentley and Phil Berlowitz

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S&P 500 posts highest close since November 8 on trade optimism

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NEW YORK (Reuters) – The S&P 500 posted its highest closing level since Nov. 8 on Friday as investors clung to signs of progress in the ongoing trade talks between the United States and China.

Investors assessed a slew of headlines on the talks, with top trade negotiators from the two countries meeting to wrap up a week of discussions on some of the thorniest issues in their trade war.

If the two sides fail to reach a deal by midnight on March 1, then their seven-month trade war could escalate.

“People are expecting some sort of positive news on trade and tariffs with China fairly soon,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

“But we won’t know until the end of next week,” he said, and, “there has been a lack of specifics.”

Optimism on the trade front and dovish signals from the U.S. Federal Reserve have driven the recent gains and left indexes well above their lows of December, when the market swooned on fears of an economic slowdown. The S&P 500 is now up about 19 percent since its late-December low.

The S&P 500 technology index was up 1.3 percent, leading gains among the 11 major S&P sectors, while the trade-exposed industrials index climbed 0.6 percent.

The Dow Jones Industrial Average rose 181.18 points, or 0.7 percent, to 26,031.81, the S&P 500 gained 17.79 points, or 0.64 percent, to 2,792.67 and the Nasdaq Composite added 67.84 points, or 0.91 percent, to 7,527.55.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., February 22, 2019. REUTERS/Brendan McDermid

All three indexes registered gains for the week, with both the Dow and Nasdaq posting a ninth week of increases.

The number of New York Stock Exchange and Nasdaq stocks hitting 52-week highs hit 367, the most since mid-September and outnumbered those hitting year lows by the widest margin in six months.

Stocks briefly pared gains after U.S. officials briefed on the negotiations said more time is likely needed in the talks given China’s resistance this week to American demands for specific steps by Beijing to end forced transfers of U.S. technology and certain other policies.

Afterward, President Donald Trump said there was a very good chance the United States would strike a deal with China to end the trade war, and that he was inclined to extend his March 1 deadline to reach an agreement.

“Right now the downside risk has been not as steep, but there’s always a concern that something happens last-minute,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

“Having a Chinese economy that stabilizes is constructive for global markets,” she said. “That’s what is key in terms of the market looking at the results.”

Kraft Heinz Co tumbled 27.5 percent, and was the biggest drag on the S&P along with a 1.7 percent fall in Class B shares of the company’s controlling stakeholder, Berkshire Hathaway Inc.

The packaged food company posted a quarterly loss, disclosed a Securities and Exchange Commission probe and wrote down the value of its iconic Kraft and Oscar Mayer brands.

Slideshow (2 Images)

Advancing issues outnumbered declining ones on the NYSE by a 2.99-to-1 ratio; on Nasdaq, a 2.45-to-1 ratio favored advancers.

The S&P 500 posted 64 new 52-week highs and three new lows; the Nasdaq Composite recorded 112 new highs and 21 new lows.

About 6.9 billion shares changed hands on U.S. exchanges. That compares with the 7.3 billion-share daily average for the past 20 trading days.

Additional reporting by Shreyashi Sanyal and Sruthi Shankar in Bengaluru; Editing by Chizu Nomiyama and Jonathan Oatis

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FCA sets $14 million annual target compensation for CEO Manley: filing

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FILE PHOTO: Fiat Chrysler Automobiles (FCA) CEO Mike Manley arrives at the memorial service held in honor of former CEO Sergio Marchionne in Turin, Italy, September 14, 2018. REUTERS/Massimo Pinca/File Photo

DETROIT (Reuters) – Fiat Chrysler Automobiles NV (FCA) has set an annual compensation target for Chief Executive Officer Mike Manley consisting of pay, cash and equity bonuses of $14 million, the automaker said in a regulatory filing on Friday.

Manley took over as the head of FCA last July after the abrupt departure of his predecessor Sergio Marchionne. The company paid its new CEO 600,442 euros ($680,240) for 2018 and he will receive a bonus for 2018 of $367,000 to be paid this year.

Manley also was granted FCA 180,364 shares for his work in 2018, which will vest in 2019 if the company meets certain targets. The fair value per share on the date those were granted was $16.61, FCA said.

His target annual compensation consists of a base salary of $1.6 million, and a bonus of $2.4 million and an equity award valued at $10 million, both linked to the company hitting certain performance targets.

Former CEO Marchionne received 6.6 million euros in compensation for 2018, which consisted of nearly 2 million euros in base pay and an annual bonus for 2017 of just over 4.6 million euros.

For the 2014 to 2017 time period, Marchionne also received 2.8 million FCA shares. The fair value per share was $14.84, FCA said.

FCA chairman John Elkann received a base salary of 1.7 million euros and no annual bonus.

Reporting by Nick Carey; Editing by Sonya Hepinstall

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Flattening U.S. yield curve in late 2018 ‘flashing red’ on economy: Fed’s Williams

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President and Chief Executive Officer of the U.S. Federal Reserve Bank of San Francisco, John Williams, addresses a news conference in Zurich, Switzerland September 22, 2017. REUTERS/Arnd Wiegmann/File Photo

NEW YORK (Reuters) – A flattening U.S. yield curve in December, which was close to being inverted, was “flashing red” about a deceleration in U.S. economic growth heading into 2019, despite some solid data at the time, New York Federal Reserve President John Williams said on Friday.

The yield curve flattens as the gap between short and long-dated yields narrow, suggesting investors’ worries about a slowing economy.

The yield curve inverts when shorter-dated yields rise above longer-dated ones. An inverted yield curve has preceded all U.S. recessions in the past 50 years.

Williams was giving closing remarks at a conference about quantitative tools, jointly sponsored by the New York Fed and the Atlanta Federal Reserve.

Reporting by Richard Leong; editing by Diane Craft

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