Why growth beat value by 20% post-2008 but may not continue to


Nov. 26 2019, Updated 4:23 p.m. ET

Risk factor#3: Value outperforms growth in the long run

The below graph looks at the performance of value versus growth indices compared to much broader indices—the Russell 2000 and the S&P 500. While the broadest of indices, the Russell 2000, outperformed all other indices, it’s important to note that, relative to the S&P 500, the Growth Index outperformed both the S&P 500 and the Value Index, and that the Value Index was the lowest-performing index of all. This pattern suggests that, in the case of economic recovery and rising stock prices, exposure to growth companies may outperform value companies, and that the broadest index exposure to a larger number of smaller companies in general, as reflected in the Russell 2000 index, may offer the best upside potential. As investment data has shown signs of recovery, growth stocks have continued to rally and outperform value stocks.

For an overview on these risk factors, please see Key strategy: 4 key risk factors as the Fed tapers.

Value stocks outperform growth stocks in the long run

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Despite the recent outperformance of growth stocks in the post-2008 economic recovery, in the long run, and over several business cycles, academic studies tend to show that value stocks outperform growth stocks. One value versus growth study, by Chan and Lakonishok, involving data from 1969 to 2001—the peak of the Dot Com bubble growth stock phase—showed that, even when one includes this frantic Dot Com growth investment era, smaller-value companies outperformed growth stocks by 18% over this 22-year period.

Growth stock bubble?

The above graph reflects a fairly long trend of growth outperforming value since the 2008 crisis. As we noted earlier, this isn’t the norm. The question remains: will this continue, or will growth stocks begin to underperform in the future, as low priced value stocks hold up better in the face of rising interest rates than large cap growth stocks?

To gain perspective on the above-noted large cap value versus growth historical return anomaly, please see the next article in this series.

Equity outlook: Constructive macro view

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Despite problems in Ukraine and China, and despite the modest consumption data in the USA, U.S. labor markets appear to be well into recovery—with the exception of the long-term unemployed. From this perspective, it would appear that the U.S. is probably the most attractive major investment market at the moment. While the fixed investment environment of the U.S. is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find their way into a new wave of profitable investment opportunities and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption and investment in the works, the continued outperformance of growth stocks over value stocks could remain the prevailing trend, favoring the iShares Russell 1000 Growth Index (IWF) and growth-oriented companies such as Google (GOOG) or Apple (AAPL).

Equity outlook: Cautious macro view

Given the China- and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index (IWM), the State Street Global Advisors S&P 500 SPDR (SPY), the Dow Jones SPDRs (DIA), and the iShares S&P 500 (IVV). Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples–related shares, as reflected in the iShares Russell 1000 Value Index (IWD), such as Walmart (WMT).


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