Growth vs. Value

Investment markets share certain characteristics with earthquakes: pressures mount as forces shift out of balance, then sometimes gradually, sometimes suddenly forces revert to a more balanced state. It is inevitable to be waiting for ‘the big one’. Preparation now for this eventuality seems the most prudent course of action.

For many months now we have been talking about growth in the equities market, some rapidly brought on by technology adoption during the global pandemic, and other more systematic, gradual growth.  Our clients have a range of growth versus value in their portfolios, and while growth stocks have been rising fast, supported by Russell Investment’s research, we believe the value stocks are about to see their natural balance restored.

A value stock refers to shares of a company that appear to trade at a lower price relative to its fundamentals, such as dividends, earnings or sales, making it appealing to value investors. A value stock can generally be contrasted with a growth stock.

At the time of this writing, growth stocks – as measured by the S&P 500 Growth Index – have gained nearly 35% over the past year on a total return basis. Value stocks, in contrast, have pretty much gone nowhere, with a meagre gain of 3.3%.

This has been an unprecedented length of time for low returns on value stocks, a trend that is unsustainable when applying historical data. There are similarities with the market activity in 1999 when there was an influx of revolutionary new technologies rising alongside established businesses causing inflated price expectations which didn’t always translate to their share price. 

Many of the stocks in the value category, usually financial services and energy companies, seem like dinosaurs now compared with the exciting technology disruptor companies.  But others see a future with well-managed banks and fairer global lending creating real value in these stocks.  The stock market is a dynamically changing reflection of cyclical conditions, individuals’ assessments and peoples’ attitudes.

Recent trends have been very good. After a rather scary decline in share prices early in the year, stocks have surged on hopeful signs that the worst may be behind us. Say what you will about 2020, but stock market investors have done okay.  And while value shares have lagged by quite a bit year-to-date, there are hopeful signs for value investors, as value stocks have led the way in the final quarter of the year. It may not take a painful market correction and its tsunami of knock-on effects to reward patient discriminators of stock values.

If you are interested in some more analysis, take a look at this article titled Will Value Outperform Growth in 2021? highlighting the rise of the non-US equities and the attractive pricing of value stocks.

The value of units can fall as well as rise, and you may not get back all of your original investment.

*Adapted from Russell Investments blog post on 6/1/21 by Jim Jornlin.