The Growth/Value Relationship Over Time
United States history is punctuated by watershed economic events that are, for better or worse, defining periods in history with far-reaching economic impacts. Periods of deep economic crisis, as well as eras of dramatic prosperity, have long shaped our nation.
Value investing has long held a structural advantage over growth investing over multiple market cycles.
During the 94 calendar years since 1927, value has outperformed growth approximately 60% of the time, or in 56 of the 94 years. This 94 year period includes economic events that have impacted the markets direction including, the Great Depression in the early 30’s, the Post WW2 Expansion in the 50’s & 60’s, the Oil Crisis of the early 70’s, the Tech Bubble in the late 90’s and most recently the Great Financial Crisis.
While these significant market events have caused growth and value to oscillate year-to-year, over long(er) periods of time, value investments have consistently provided greater returns.
The Growth Cycle: 2007 to Present
The current growth cycle, led by transformative advancements in mainstream technology, has dominated the investment landscape since 2007. It followed the sustained value investing cycle from 2000 through 2007 that helped stabilize a financial market in turmoil after the Dot.com bubble burst in early 2000. Six companies – Amazon, Apple, Google Alphabet, Facebook, Netflix, and Microsoft – are the primary catalysts for the current cycle and, as of 12/31/20, represent 23% of the S&P 500 index. The following tables demonstrate just how impactful these six companies have been during this era.
Market Rotation: The Shift to Value
Many investors question the relevance of value investing during sustained growth cycles. History indicates that market leadership regularly shifts between growth and value. Since 1986, the average change in market leadership between growth and value, based on 36 month rolling returns, occurred every 15 months. The current growth cycle is now in its 48th month, starting in January of 2017.
We at Anchor believe the market rotation from Growth to Value is underway:
- Extreme Valuation Gap: The current valuation gap between growth and value stocks has not been this extreme since the tech bubble of the late 1990s, when significant value outperformance followed in the subsequent years after growth stock valuations peaked in August 2000. In the current cycle, we feel this valuation disparity peaked in August 2020.
- Covid Stimulus, Vaccine Rollout, and the Biden Agenda: As the pandemic recovery accelerates, along with the rollout of the Biden Administration’s economic agenda, we believe it will lead to a growing economy, strong stock market, and higher interest rates. Higher rates tend to support value investing. Growth stocks are unlikely to be able to sustain their lofty valuations -which have been fueled by historically low interest rates.
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