Sunday, September 20, 2020

Here We Go Again: Value To Finally Outperform Growth?

So far for most of the month of September, the large cap value stock space has outperformed large cap growth. Since the end of the financial crisis of 2008/2009 I have probably written about the market's turn to favoring value at least a dozen times. If performance is the yardstick, the growth style has ultimately been favored by investors for the last ten or eleven years as seen in the below chart.

Looking at a shorter time frame one can see this burst of value outperformance. Notable is the fact value has had small periods of outperformance at other times as well.

In a mid-2018 article, Is The Value Style Really In Favor Now?, I was hesitant about value's ability to take over market leadership from the growth style. In that article I wrote, "What gives me pause is the fact history has mostly supported value outperformance coming out of a recession. Late in an economic cycle growth tends to dominate performance as growth type companies tend to grow earnings in spite of the economy." Since the beginning of the month, the industrials and materials sectors are outperforming and these are economically sensitive sectors. The sector laggards are growth oriented ones, technology and communication services.

It is a strong economic recovery that really favors value following the end of a recession. Having noted this, the value style is certainly in a better position to outperform growth today than probably any other time over the last decade as the economy exits this virus induced recession. I am still not convinced value does outperform growth though, at least not broadly. In the Russell 1000 Value Index, financials remain the index's largest sector with a 18% weighting and the technology weighting is only 10%. For value to outperform, financial stocks will likely need to exhibit some market leadership and technology stocks will need to lag. Technology's weighting in the Russell 1000 Growth Index is 44%. With the low level of interest rates, a flat yield curve and the Fed's desire to maintain a low level of rates for the foreseeable future, it likely remains a difficult operating environment for many financial firms.

For investors, due to the magnitude of growth's outperformance versus value, it is prudent to be mindful of a potential rotation into value. Additionally, with technology accounting for 44% of the growth index, followed by discretionary at 16%, of which Amazon (AMZN) is half the discretionary sector weighting in the index, if large cap technology lags for an extended period of time, this would likely lead to value outperformance, all else being equal.

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