Growth Stocks Clobbered: A Changing of the Guard to Value?
Matt Weller, CFA, CMT September 13, 2019 2:07 PM
This week’s price action suggests that we may be nearing a “changing of the guard” to value stocks
Since at least 1934, Ben Graham published his seminal book Security Analysis, value investing has been arguably the single most successful strategy. After all, who could argue with buying companies that are cheap relative to underlying fundamentals like earnings, sales, and dividends?
Well, after a decade’s worth of underperformance, even the most diehard value investor is asking whether the strategy is obsolete in an era of relentlessly growing technology platform companies like Facebook, Apple, Amazon, Netflix, and Google.
While it’s a bit beyond our typical traders’ timeframe, we would note that similar periods of extended value underperformance have eventually led to dramatic reversals back in favor of cheap stocks. After trailing the S&P 500 in the peak of the tech boom from 1996 to 1999 (to say nothing about the more dramatic moves in the high-flying Nasdaq), Warren Buffett’s value-focused Berkshire Hathaway went on to outperform the index by nearly 25% per year from 2000-2002!
This week’s price action suggests that we may be nearing a similar “changing of the guard” back toward value stocks. With more than $85B in combined assets, the Russell 1000 Growth and Value ETFs (IWF and IWD, respectively) represent a massive allocation to the opposing investment strategies. As the IWF/IWD ratio chart below shows, growth has been dramatically outperforming value over the last three years:
Source: TradingView, FOREX.com
While the trend in this chart is clearly higher, we wanted to highlight this week’s big drop in the ratio. As of writing, growth stocks (IWF) have underperformed value stocks (IWD) by 2.8% this week alone. If it holds through the rest of the trading day, this would mark the biggest shift in favor of value stocks since the Great Financial Crisis in 2009!
Of course, we’ve similar one-week “growth panics” do little to deter the long-term trend in favor of growth, but at a minimum, this week’s drop should serve as a reminder that growth doesn’t always outperform value, and could lead to more two-way trade moving forward.
For an alternative (or at least more balanced) view, see my colleague Ken Odeluga’s article “Nasdaq bounce shoves aside value ‘comeback’” from earlier this week!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.