Growth Vs. Value

The strong market rebound in the second quarter lifted the relative return of Growth vs. Value to an all-time high by the end of June. Chart 1 reveals that the cumulative S&P 500 Growth / Value return spread hit a new record last month, surpassing the previous high reached at the end of the Tech bubble in June 2000. 

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Late last year, we presented data showing that profitability has become more elusive for small companies despite a record-long period of economic expansion. We discussed the potential causes underlying this phenomenon.

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Style rotation! Regime change! Market action of the first two weeks of September coaxed the few remaining Small Cap Value managers off ledges from New York to San Francisco.

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As the market rebound has extended, we’ve noted its striking similarities with the rally of 1999—one that might have been the most speculative in U.S. history.

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We thought Jerome Powell’s “Christmas Capitulation” would be tough to beat, but he accomplished that two days ago with what could be called his “Spring Surrender.” That, in turn, has rekindled hopes of a stock market melt-up along the lines of 1998-99, which, as old-timers will remember, followed a late-cycle correction that was nearly identical to the one seen last year.

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Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.

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Value is the philosophical cornerstone of many legendary portfolio managers and is widely recognized as one of the most robust quantitative investment factors. Yet, despite its compelling conceptual merits and long-term record of superior returns, recent years’ underperformance of Value has lasted long enough to weigh on even 10-year performance records. 

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Growth has trounced Value over the past year, continuing a decade-long trend of outperformance...

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Despite cyclicality, over the longer term, investing in lower valuation countries ekes out better performance in an EM portfolio, and Dividend Yield showed the most consistency in terms of value factor effectiveness.

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Investment factors experience performance cycles just like every other asset and index. The Value factor is robust across definitions, as all eight versions produced positive excess returns under long/short and long-only methodologies.

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The impact of atypically-high current valuations has become a challenge for style-box investing. High quality, mature dividend payers have habitually resided in the Value and Blend boxes, but investors have bid up those valuations as they look for alternatives to low bond yields.

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Signs of a leadership change are starting to spring up between Growth and Value. Since mid-2015, Mid and Small Cap Value stocks have outperformed Growth.

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Small Cap Growth stocks have gotten off to a rotten start in 2016—down almost 12%. On a relative basis, the segment has also been lagging Small Cap Value—underperforming by 9% since last July.

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Our current view is the lift-off will be December or later. Assuming inflation will pick up and the Fed hikes the rate by the end of 2015, stocks will perform relatively well, with international stocks a better bet than U.S. stocks.

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Will Rogers said, “It isn’t what we don’t know that gives us trouble, but what we know that ain’t so.”

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Big cap growth stocks appear to be in the early stages of regaining leadership from the “tired” cyclicals and “overvalued” value stocks.

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Growth stocks have been out of favor over the past 3-4 year, but look poised to regain leadership over the next 6-12 months.

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A glance at the popular market averages made April look like a pretty good month in the stock market. But if your equity performance in April matched those numbers, you must have had a well-oiled portfolio of deep cyclicals.

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Secondary stocks’ August performance, growth vs. cyclical and growth vs. value performance, S&P and DIJA historical valuations and the Royal Blue Index.

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This month we added three new stocks from Jim Floyd’s “Undervalued & Unloved” screening work, boosting our current commitment to value stocks to 16% of portfolio assets. We now believe Value's downtrend has reversed and this view seems to be confirmed by the relative strength line.

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