Is the elastic about to snap?
18th September, 2019
The dominance of large growth stocks over unloved value names has proved the John Maynard Keynes adage that markets can stay irrational longer than investors can stay solvent. Yet this week saw the strongest sign yet that the environment may be about to change.
• Value saw its strongest performance relative to growth since early 2013 at the start of this week
• Growth has outperformed value for almost a decade and now looks highly priced
• The trend could build quickly if there are early signs of a change in market conditions.
In a blink-and-you’d-miss-it moment, on Monday 9th September, value stocks significantly outperformed growth stocks, by a factor not seen in over six years. Data compiled by Bespoke Investment Group showed the day to be the momentum’s worst daily performance relative to value since its inception in early 2013.
While the S&P 500 was largely unchanged in aggregate, there was a vast gap between value and growth stocks. According to CNBC, the iShares Edge MSCI USA Value Factor ETF (VLUE) jumped 1.8% on Monday while the iShares Edge MSCI USA Momentum Factor ETF (MTUM) dropped 1.7%.
In real terms, this meant that while the market was flat, it was a a horrible day for the likes of Diageo, Nestle and all those other ‘bond proxies’ that investors had chased for so long. It was a great day for higher quality cyclicals.
Fund managers have long suggested that the gap between these two parts of the market looked anomalous. While many quality growth stocks have been doing their job, delivering consistent earnings and growth, their shares have been re-rated to such an extent that they could no longer be described as defensive. At the same time, the fundamentals for ‘value’ stocks had been improving. However, with global growth anaemic and investors still risk-averse, there seemed no catalyst for a reversal.
Is this the market finally returning to its senses? It is difficult to draw any meaningful conclusions about a single incident, though growth stocks have continued to lag value in subsequent days. For anyone who believes that markets are irrational in the short-term, but rational in the long-term, the elastic has to snap at some point. Perhaps this is the moment.
It is also worth noting that the trend could build quickly if there are early signs of a change in market conditions. A lot of investors have been waiting a long time for value to gain traction and there may be some frantic scrambling to adjust portfolios. It may also mean a tougher time ahead for conventional index trackers. No predictions, but investors may need to stay alert.
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