The stock market is expanding. There is good news and bad news out there.
If you’ve only been following the stock market since the start of 2021, you’re more thinking of so-called “value” stocks. This is the market segment that includes stocks and sectors that tend to grow their earnings more slowly than “growth stocks”.
Of course, there are many variations of investing for value and growth. However, the general rationale for owning value stocks is that long-term returns are more likely if you buy a stock when it is statistically cheap and undervalued relative to its future prospects.
This brings us to the current investor conundrum. You see, the bigger growth stocks have outperformed the bigger value stocks for a very long time. In fact, as this chart shows, when you divide the top 200 US stocks into growth and value groups, you find that growth has outperformed value by more than 2: 1 since ETF inception to track that tranche. of the stock market at the end of 2009..
This may partly explain why some equity investors think their investment advisor is a genius, and others think their advisor isn’t trying hard enough. If you are a value investor, you have underperformed the large cap market (blue line above) by around 150% during this time frame. However, if you are a growth enthusiast, you have outperformed the “market” by about 150% over the same period.
These numbers are too big to ignore. They say a lot about our journey. However, what should interest you is not where we have been, but where we are going. So, let’s look at that next.
This is a small 3-month sample, but value stocks have a good start to 2021. Meanwhile, growth stocks are just above the breakeven point. If LeBron James has a bad game, you don’t change your mind about how great he has been throughout his career. So, growth stocks are lagging behind in 2021, but they’ve been the place to be with a 20-20 pullback.
The valuable crowd has been screaming about a value return for years. This happens for a little while, and then growth becomes dominant again.
Since neither you nor I can predict the future with extreme accuracy, I will instead emphasize some essential facts about the value and growth of stock market indices as they stand today.
- The growth index is VERY heavy. 6 stocks represent approximately 47% of the Russell Top 200 Growth Index. You can probably guess which ones, but for the record, these are Apple
AMZNn, Facebook, Tesla
TSLAand Alphabet (Google’s parent company). In fact, the top 3 of this group represent about 1/3 of this index.
- The value index is exactly the opposite. Unlike 6 stocks representing 47% of this segment, it takes 26 stocks to do the same in the Russell Top 200 Value Index.
- This indicates that large cap growth investing has become a victim of its own success. In other words, so much money has piled up in large cap growth indices, and a dominant part of that money is invested in a small number of stocks, it creates a potentially dangerous situation. Any change in trend among leaders at the top could reverse the entire growth stock. If you own some of the other stocks in this growth index, but not the most important ones, you could be caught in the storm, so to speak.
- Value stocks are winning over growth stocks, but they’ve also come a long way. Their rate of performance over the past decade would still be considered excellent in a historical context. So value investors should not be disappointed, but perhaps a little jealous of their growth counterparts. But jealousy is not a good way to invest!
- What the value crowd has for this is that the stocks that make up “great value” are more diverse. Financial stocks, some consumer and even tech giants are in the value category these days. The implication is that there is less risk of “following the leader into the well” like there is in growth stocks that are currently investing.
No time like the present
Whatever your investment process, this might be the best time to take a look at how stock indices are structured with respect to the growth / value paradigm. Indeed, growth success has skewed it into a potential danger zone, and value, although lagging behind, still does not have the kind of heavily discounted valuations that tend to produce strong performance. long-term.
In other words, there are no easy calls in the stock market. Attention to detail is essential. This will help you determine if you are taking more risk than you thought and will help you think about how you might rethink your allocation between value and growth. This is the case whether you invest in individual stocks or ETFs.
Comments provided are provided for informational purposes only, and not individual investment advice or recommendations. Sungarden provides advisory services through Dynamic Wealth Advisors.