Growth companies have been significantly outperforming value companies since early 2007 with just a few periods of value relative performance. There are many reasons for this, one of which is the simple concept that when something is scarce — economic growth and corporate growth — people are willing to pay up for it.
The economic recovery since 2009 has been sub-par from a historical perspective. Normally, a recovery has about 3.2% annual GDP growth for the expansion; the current expansion has seen roughly 2.2% GDP. Why you ask? Debt, deflation, demographics are a few reasons. The debt situation at the governmental and corporate level has only gotten bigger, that will act like an anchor to growth. The deflation situation is largely in place as technological innovation continues to put downward pressure on things like productivity, prices, etc. Millennials and demographics are a bright spot as they are now the average age of the baby boomers in 1982 and we know what that population group did to the economy, markets, and real estate market. All in all, I believe economic growth will stay rangebound and lower than “trend” for longer than people believe.
In that environment, growth stocks should continue to perform well versus value stocks on an absolute and relative basis.
Value and cyclicals are outperforming growth currently. There was an incredible amount of money crowded into bonds, low volatility/defensive equities and high growth stocks as the fear trade began to build. Once the Federal Reserve pivoted and became more dovish, the recession fears abated, and money began rotating out of the crowded trades and into the under-performing value and cyclical stocks. That certainly could continue for a while longer but as the great growth brands get sold, driving their valuations back to more attractive levels and as economic growth stays anchored, it won’t be too long before that fickle money rotates right back into growth stocks. I’m open to the possibility that a new value>growth cycle has begun but until the line breaks the uptrend in the chart below, growth on sale will be what I favor.
Large cap growth versus Large Cap Value: Ratio chart from 2007 to today.
When the line is going up, growth is outperforming value. As you can tell, we were at the top end of the channel and now we are back away. There certainly could be more room for value relative performance but I am watching this chart closely for clues.
Russell 1000 Growth ETF returned 252%
Russell 1000 Value ETF returned 114% or HALF what growth offered.
The S&P 500 ETF returned 117%
Eventually value will start a multi-year run of outperformance versus growth. Maybe it’s already started, maybe this is just another short-term period of money rotating to value. That said, I believe that the bottom line for financial advisors and their clients include the following:
- Asset classes and styles move in cycles and those cycles tend to be multi-year in duration.
- Growth will eventually begin to underperform value on a multi-year basis.
- Other than short-term periods of growth underperformance, the economic growth environment favors growth companies over value.
- Given how stretched the growth versus value performance has been, it should be no surprise that we are seeing a value renaissance.
- When the growth versus value ratio chart above breaks the uptrend line, we will all have significant evidence to tilt a portfolio away from growth and more towards value.
- For now, that evidence is not present so I will stay overweight growth stocks and that is where future buys will be focused.
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.