NEW YORK: A return to fashion of growth stocks in 2019 helped lead the overall market out of a year-end shakeout, but another multi-year run of growth performing better than value may not be in the cards.
The S&P 500 has rallied nearly 18 per cent since its Dec. 24 low. During that time the Russell 1000 Growth index has fared even better with a gain of almost 20 per cent while the Russell 1000 Value index has lagged with a gain of about 17 per cent.
That marks a reversal from the fourth quarter, when value outperformed as stocks nearly tumbled into bear market territory, a trend some analysts feel will return as the market grapples with several major headwinds such as Brexit and trade negotiations.
Growth investors typically search for companies that have higher profit growth and margins, while value investors look for stocks that seem inexpensive.
Shortly after the S&P hit its most recent record on September 20, thanks to the out performance by growth, especially technology stocks, the spread between the Russell 1000 growth and value indexes had surpassed the levels hit during the end of the dot-com era. The fourth quarter sell-off helped that narrow but it began to widen again shortly before the new year.
“The valuation imbalance we have seen between growth and value in the large-cap space ... when we have seen that inflection point in the past there has been a very powerful long-term rally where value has outperformed growth and we think that is coming up,” said Phil Orlando, chief equity market strategist, at Federated Investors, in New York.
In a recent note to clients, Morgan Stanley equity strategist Michael Wilson said that the stocks that got hit first and hardest during last year’s “rolling bear market” would lead the recovery this year and rally the hardest.
That prediction appears to be playing out as areas such as transportation, considered cyclical value, have been among the leaders to the upside this year.
Wilson anticipated the Federal Reserve will hold off raising interest rates further and that the global economy would bottom in the first half. He favours value over growth, with a focus on cyclical over defensive stocks.
Value stocks also remain cheap relative to growth shares, with their widest forward price-to-earnings ratio spread in over a decade. — Reuters
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