“From the Desk of Michael Sheldon, CIO”
Over the past several years, one trend that has largely (except for a few quarters from time to time) remained in place has been that U.S. growth stocks have continued to outperform U.S. value stocks. This is a trend we are well aware of at RDM Financial. A number of possible explanations have been given but there is no easy answer to explain why this multi-year trend has gone on for almost a decade at this point. From our perspective, growth has outperformed value due to: 1) quantitative easing and low interest rates as a result of policies implemented by the Federal Reserve bank over the past several years; 2) the fact that growth during the current economic expansion has been the weakest in the post WWII period and 3) that investors have tended to favor technology and consumer discretionary stocks (the two biggest weights in the Russell 1000 Growth Index) for much of the past several years.
One additional factor is that the outperformance in growth versus value over the past several years has coincided with a persistent narrowing of the yield curve i.e. the spread between 10 year and 2-year U.S. Treasury Bond Yields (see chart below – source: Factset). For reference, the blue line in the chart below represents the relative outperformance of the Russell 1000 Growth Index versus the Russell 1000 Value Index while the red line (inverted) represents the spread between 10 year and 2-year U.S. Treasury Bond Yields. The narrowing in bond yield spreads that has occurred over the past several years is a normal part of the investment cycle. It occurs as the central bank normalizes (i.e. raises) short term rates as the economy strengthens coming out of economic downturns.
The multi-year period of growth outperforming value has lasted for quite a while. At some point, value stocks will ultimately start to outperform growth stocks once again but it’s difficult to tell exactly when that time will be. For reference, the three biggest weights in the Russell 1000 Value Index are financials (28%), healthcare (14% – mostly pharmaceutical and large cap biotechnology stocks) and energy (10%). Looking at historical valuation levels (comparing the Vanguard Value Index ETF versus the Vanguard Growth Index ETF), growth stocks currently trade at a 10% premium to their 15-year average while value stocks currently trade at an 8% discount to their 15-year average. While growth stocks are currently at a modest premium (to their historical valuation level) and value stocks are a small discount, these numbers do not look overly excessive right now.
Looking ahead, for value to start outperforming growth again, we believe that financial stocks will have to start demonstrating stronger performance, the yield curve will need to start expanding again and investors will need anticipate a broad-based pick-up in the economy.
Time will tell!
As always, we welcome any comments you may have.
RDM Financial Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.