There are many ways to slice and dice the market to gain insights into its recent performance, but perhaps the simplest and sometimes the most effective way is to look at growth vs. value.
The chart below shows the weekly performance of the Russell 3000 value index. In the background (in gold) is the same for the Russell 3000 growth index. The chart shows clearly that growth has outperformed value in 2017. In fact, it is possible to divide the Trump rally into two phases: the period immediately after the election, when value beat growth, due mostly to optimism about growth expectations for the economy. That outperformance lasted until the week ended Dec. 9, when investors seemed to say “enough” to value stocks (e.g. financials, industrials, materials, consumer discretionary and perhaps most importantly, energy) and began to press forward with growth. From that point on, value stocks began to lag and growth took over market leadership.
Courtesy of StockCharts.com
To be sure, value got a “second wind” from late January until late February, but since then, it has been drifting slowly downward. Growth too took a pause in March, but it mounted another rally in April, taking the overall market to new highs.
The March market hiatus may have been caused by several factors, including disappointment over progress on President Trump’s agenda, mixed economic data and concerns about stretched valuations. The April rally may also be viewed as suspect by some, especially because the rally in growth stocks has become ever so narrow, with the technology megacaps – Facebook, Amazon, Netflix and Google (aka Alphabet) and even Apple – leading the way. (Is Apple now considered a growth or a value stock?)
If you are bearish, you view this narrow leadership as a warning sign. If you are still bullish (even grudgingly so), you might view this as market rotation with an upward bias.
Obviously, the widening gap between growth and value cannot continue forever. If the market is to continue its upward climb, which seems likely for the foreseeable future (until some new development causes a clear shift in market psychology), investors will begin to fall in love with value stocks once again.
May 14, 2017
Stephen P. Percoco
Lark Research, Inc.
839 Dewitt Street
Linden, New Jersey 07036
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