Growth vs. Value
The S&P 500 rose for the third straight week to close only about 5% below its February all-time highs. Beneath the surface, however, the market has become unusually bifurcated between growth and value investing styles. Entering the week, for example, the Russell 1000 Value Index, which is hallmarked by mid to large-cap US stocks with traditionally attractive valuation metrics such as low price-to-earnings ratios (i.e. Berkshire Hathaway, Exxon Mobil, Comcast), was down over 15% year-to-date.
On the other hand, the Russell 1000 Growth Index, which focuses on mid to large-cap US stocks growing earnings faster than the average company (i.e. Apple, Microsoft, Amazon) entered this week up over 15% year-to-date. While such a sharp divergence admittedly makes sense as certain industries and sectors have been particularly hard hit by coronavirus, the roughly 30% variance between growth and value stocks is the widest we have seen since FactSet started recording the data going back to 1979.
Ultimately, value stocks likely need to participate in this rally if we are to reach new all-time highs and while it is much too early to declare a resurgence in old economy stocks, this week’s market action was encouraging. The Russell 1000 Value Index finished the week up over 3% while the Russell 1000 Growth Index fell over 1.2% and this was the first week since the beginning of June that value outperformed.
What’s Driving Value?
Exactly what drove value’s out-performance is unclear, however earlier in the week a rotation from growth to value seemed to coincide with much stronger than expected import/export and GDP data out of China. Many market participants monitor China’s economic recovery for signs of how the US might ultimately fare, so signs of a V-shaped recovery overseas likely buoyed sentiment around our own reopening prospects.
In addition, encouraging domestic data such as the highest industrial production reading since 1959 as well as much better than expected retail sales for June likely added to optimism around old economy stocks. It should be noted, however, that growth has outperformed value for eight of the last ten years and value stocks’ previous attempt to rally in May ultimately failed as coronavirus infection numbers accelerated and many states paused reopening efforts. We will continue to watch value versus growth stocks very closely and would welcome the continuation of this week’s rotation as market rallies that have broader industry and sector participation typically prove to be more sustainable.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO