Monthly Markets Memo - November 2019
by Dan Zalipski, CFA
Something interesting happened in the markets in the last couple months as value stocks came to life posting returns that nearly double that of their growth counterparts. Value and growth are two labels in an overly simplified yet effective way to categorize different types of stocks.
Value stocks tend to be long-established companies with low levels of growth compared to their growth stock counterparts. Their stock prices tend to be lower relative to their fundamental components, such as earnings and dividends. Investors like to think of value stocks as bargains. The market has undervalued the stock for a variety of reasons, and the investor hopes to get in before the market corrects the price. Growth stocks, on the other hand, are those generating revenue and profits at a faster pace than industry average. They tend to be more expensive relative to their fundamentals, but investors generally pay up for growth stocks with the belief they will outperform the broader market. Both value and growth stocks can be susceptible to market volatility. Neither are objectively better or worse, but play different roles depending on an investors risk tolerance and goals.
Growth has been outpacing value for the better part of the past decade. Since the market bottomed after the Great Financial Crisis in March of 2009, S&P growth index is up over 400%, while the S&P value index is up around 250%. This performance gap between the two categories is significant and has rarely been wider than it is now. The Fed’s monetary policies that are holding rates at historically low levels has been a driving force behind growth’s out-performance over value. Lower rates make it cheaper for companies to borrow, benefiting growth over value as growth companies are more likely to borrow to expand.
Investors were surprised when value came to life in September and October. This is especially true considering the Federal Reserve cut interest rates by 0.25% in both months, a move that should help growth stocks more than value stocks. Since the beginning of September, that same S&P growth index is up about 4%, where the S&P value index is up 10%. This has some speculating that it is time for value stocks to finally catch-up to growth stocks and narrow the performance gap. This call, however, is not a new one as analysts and investors alike have made this same prediction numerous times over the past decade. Still, some investors think value’s time has arrived. They argue that value tends to outperform when macroeconomic data starts to recover from depressed levels, much like the slowdown the U.S. is currently navigating through with the hope of avoiding a recession. Value can also benefit from a re-acceleration in corporate earnings as investors become less willing to pay a premium for growth companies as profits recover. U.S. earnings growth has been negative much of the year, but is expected to rebound in 2020. Still, others argue with the Fed lowering rates, the macroeconomic backdrop will continue to favor growth stocks.
Value’s long-sought comeback is not a matter of ‘if’ but ‘when’. At some point, the backdrop will change, and valuations will be hard to ignore. Growth will look overly expensive, value will look overly cheap, or some combination therein. Investors know the timing of these rotations are notoriously difficult to predict. Disciplined investors tackle these issues with a consistent balanced approach to allocating their investments to a diversified selection of stocks rather than make bold predictions and speculative bets on one style over another.
“The market can remain irrational longer than you can remain solvent.” - Economist John Maynard Keynes
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.