The Dynamic Between Growth and Value Stocks

The Dynamic Between Growth and Value Stocks

A question we’ve gotten a lot over the past few years has centered on the dynamic between growth-oriented investments, and their subsequent multi-year outperformance relative to value-oriented investments. Wells Fargo Investment Institute Senior Global Equity Strategist, Scott Wren, recently wrote some commentary that we found encouraging given the recent outperformance of value-oriented stocks over growth-oriented, momentum driven stocks. This piece only reinforces Madison’s approach of creating globally diversified portfolios. We never know when value or growth will be “in-style”, or when investors will take profits in those areas forcing them to reallocate investment dollars, or when the emotional elements of investing – fear and greed – whipsaw the market. Thus, we stay diversified and don’t worry much about day-to-day volatility.

Over the last month or so, value stocks have outperformed growth stocks. This has been a completely counter-trend move compared to the previous five-plus years where growth dramatically outperformed-whether you look at the S&P 500 Pure Value Index versus the S&P 500 Pure Growth Index or virtually any other that tracked the two (i.e., Russell indices). The question is whether this is the start of a new trend or just an aberration. A bit of clarity and some definitions first, however.

Growth stocks typically are expected to grow earnings well in excess of the average company. Most do not feature an attractive dividend yield (if they pay dividends at all) as they are reinvesting their earnings back into the company to product higher growth. In addition, these companies frequently control a meaningful percentage of revenues in their industry. Value stocks, on the other hand, often feature an attractive dividend yield and trade at a price that is below what investors might consider “fair value” based on future expectations. Low price-to-book (P/B) and price-to-earnings (P/E) ratios are also common traits. Some might also consider value stocks, overall, to be more sensitive to the ebb-and-flow of the economy.

So given that brief background info, we’ll go back to the basic question of whether or not the tide has turned and growth stocks are going to take a backseat to value. Let’s think about this logically for a minute. Sectors like Information technology and Consumer Discretionary have a large concentration of growth stocks. The Tech sector is the best performer on a year-to-date (YTD) basis, up nearly 30%. The Consumer Discretionary sector has also been an outperformer in 2019, posting a gain of nearly 22%. But more recently, some of the largest capitalization companies in these sectors have underperformed as traders took profits in the wake of the YTD outperformance and increased negative risks in terms of U.S./China trade negotiations and global growth prospects.

In addition, companies in the Financials sector carry a heavy weighting in value indices. This sector is up more than 8% over the last month, beating the S&P 500 by nearly 3.5% while Tech and Consumer Discretionary trailed the index. The Energy sector also carries a meaningful weight in value indices and has rallied more than 10% over the last four weeks.

“Price is what you pay. Value is what you get … In the business world, the rearview mirror is always clearer than the windshield.” – Warren Buffet

Emphasis by Madison

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed herein are those of the named advisors at the time written.  Actual economic or market events may turn out differently than as presented . © 2019 Madison Wealth Management