IIn some of our previous updates, we’ve discussed how value is now relatively outperforming growth. Now we don’t want to hit a dead horse by talking about this topic as we have discussed many times before, but in the last 10 years it has been very rare for the value to outperform.
When we think of growth stocks versus value stocks, there is a definition that is more related to the underlying businesses: value stocks typically have low price-to-book values, high dividend yields, and low price / earnings ratios; Growth companies have exactly the opposite. Put simply, value stocks are made up primarily of financials, healthcare, industrials, and energy. Growth stocks will be primarily technology related: technology, discretion (which houses Amazon and Tesla), and communications services.
Guided tour in the last 6 months
Over the past 6 months, value stocks have outperformed growth stocks relatively better. The following table shows a relative performance graph of growth versus value (orange) and value versus growth (blue) as an illustration. The charts are contradicting each other and show the same fact: the value has outpaced growth over the past 6 months.
Canterbury Investment Management
Leadership for the past 30 years
Let us now consider a historical perspective. The graph below shows the same two relative performance graphs from 1994 to today.
Here are some key points. We have arbitrarily highlighted 3 segments of the diagram. The first shows how the technology bubble of the 2000s is bursting. Prior to this period, growth stocks (technology stocks) had outperformed value stocks by a large margin, but when that bubble finally burst, growth stocks lagged far behind. On the way into the financial crisis, value stocks (led by financials) outperformed and have since underperformed. The last highlighted section shows that growth stocks are again outperforming heavily (as indicated by the parabolic slope of the orange line during this period). As shown in the previous chart, value stocks have led the way for the past 6 months, which hasn’t happened much, if at all, in the past 10 years.
After observing the past 30 years of value versus growth, we go back even further to 1926. A chart created by Pacer ETF Distributors and featured on an ETF Trends webcast shows the relative performance of value versus growth since 1926 highlighted. As mentioned earlier, growth stocks have dominated the market for the past 10 years. The value has developed below average. Indeed, looking at the long-term historical chart below, it has seen many periods of outperformance. If you only look at the past 10 years, or even since 1990, this might surprise some people. Every dog will have its day, and the value certainly has many good decades behind it.
This update is not all about growth versus value. The purpose is to illustrate that all asset classes will have periods when they are for or against favor, bull markets or bear markets. There will be periods when growth stocks are less risky than value stocks. There is no law that says that value is always safer than growth, or that growth always exceeds value. We have seen growth stocks outperform value dramatically over the past 10 years. As a result, the technology sector has grown to 40% of the S&P 500 market index. The last time this happened was in 2000 before the technical crash.
Investors have preferred growth stocks, and that growth has driven the markets for the past 10 years. This market event is not permanent. For example, the last 6 months have been led by value stocks. Many investors today are wondering, “Will the next 10 years look like the last 10?”
That is why an adaptive portfolio is important. The markets will go through many different environments. We haven’t seen a real bear market in the last 10 years. The markets were largely low risk with the exception of a few trading anomalies. Nobody can predict the future. Right now the market is low risk and meanwhile the value leads to growth. That being said, there will be a bear market. If so, an adaptive approach to navigation is vital.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.