Why have value stocks underperformed so badly since the Global Financial Crisis in 2008?
That’s been the biggest question for traditional investors over the last decade.
Despite having strong cashflows, reliable dividends, and time-tested business models, value-oriented companies have been left in the dust by technology and growth stocks.
There’s a simple reason for this, which I’ll share with you in today’s essay. Even more important, I’ll show you how to thrive in this environment…
But before we get there, let’s first take a look at the qualities that set these two groups apart…
The Two Ends of the Investing Spectrum
There’s one man largely responsible for the rise of value investing – Benjamin Graham. Graham was widely known as “the father of value investing” in the 1930s to the 1960s. Since then, value has largely been determined by dividends and income streams.
It’s easy to predict value for solid companies. It’s even common to price future income into the current value. After that, all you have to do is compare the stock to the current interest rate to assess whether it has any value.
However, interest rates have been near zero since 2008 – save for a short-lived Fed rate hiking campaign in 2017 and 2018, which was quickly reversed last year.
As a result, the definition of a value stock has been corrupted. If there’s no reliable interest rate to use as a barometer, it’s hard to determine what a value stock is.
At the other end of the spectrum, growth stocks thrive on low interest rates. Most of them don’t pay dividends. Their future cashflows are difficult to predict. So, they don’t show up when value investors screen for new opportunities.
The massive amount of money printed, combined with low interest rates, has made it very easy to raise capital for speculative ventures. As a result, everything from electric cars to reusable rockets has enjoyed consistent funding.
Low interest rates robbed value stocks of an investment rationale and handed it to growth stocks.
Over the last few months, though, there’s been a big change in the stock market… Bond yields have been trending higher.
These yields act as an interest rate for the value sector. Higher yields mean growth stocks may have to pay more to source new capital. If this happened, we’d see a fall in growth stocks and a rise in value stocks.
So, the rise in value stocks is underway…
Take a look at this chart of the Vanguard Value ETF divided by the Schwab U.S. Large Cap Growth Fund.
The blue line represents the ratio between value and growth stocks. If the line is falling, it means that value is underperforming growth. If the line is rising, it means that value is outperforming growth.
If you look at the red circle above, you can see the line is beginning to break higher. This means value stocks have begun to outperform growth for the first time since 2018, with potentially more to come.
We’re starting to see clear evidence of that in the stock market. Big name growth stocks like Tesla are looking tired, while value stocks like Exxon Mobil and Goldman Sachs are starting to perk up.
Growth stocks do exceptionally well as long as the Fed floods the market with new money. That’s been the case since the bull market began in 2009. Every time the stock market looks bearish, they supply more cash and cut rates.
Before long, the Fed will have to make a choice. I’m betting they’ll take action to stop rising bond yields. Once that happens, it’ll cap value stocks’ outperformance again and create another buying opportunity in large cap growth.
So, if you’re looking to buy more growth stocks, now is the time for patience.
All the best,
Co-Editor, Market Minute
Mike’s note: This past week, we’ve been featuring a special segment of Market Minute with hedge fund trader Larry Benedict. He’s been trading for over 35 years, and on Wednesday he’s hosting a special presentation to help other traders be successful during a short timeframe he calls the 7-Day Blitz.
Larry has an edge over other traders by using his special technique and one ticker that has allowed his readers to see 248% gains, in just days, during this volatile period in the markets.
So, join Larry on Wednesday, March 10 at 8 p.m. ET to learn more about the 7-Day Blitz and how you can take advantage of this unique phenomenon.
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