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Well, after a decade’s worth of underperformance, even the most diehard value investor is asking whether the strategy is obsolete in an era of relentlessly growing technology platform companies like Facebook, Apple, Amazon, Netflix, and Google.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:
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!
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.
Recommended Content
Editors’ Picks
EUR/USD stays below 1.0800 after upbeat US data
EUR/USD stays under bearish pressure and trades slightly below 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold clings to strong daily gains above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.