Often, investors view the market with either a growth or value mindset. While each style has its own merits, growth investors are typically more comfortable investing in companies they think can deliver above-average returns, while generally taking on a higher level of risk. Value investors prefer flocking to stocks that typically have more muted (but dependable) performance or are considered undervalued versus their competitors.
With today’s market dynamics, the age-old debate of growth vs. value has resurfaced once again, and the competition is heating up. Over the past few weeks, there have been periods when value has taken the market lead, giving the long-starved value investing camp a taste of victory, only to be retaken by the growth investing camp shortly thereafter.
It’s no secret that growth has largely won the past decade with the U.S. economy in a record-long expansion. Now, we’re in a recession that may pass by the fall, according to Wall Street’s forecasts. In theory, this should be a time when value stocks shine, yet growth stocks have taken a commanding lead.
Let’s dig into this growth vs. value match, and how we think things could play out.
Growth: The Hare
Growth stocks include many of the market’s power players – technology, healthcare, communication services and consumer discretionary stocks. They typically lead the pack when the broader market is rising, but they’re also often the first to be sold in times of trouble.
Since 2009, growth stocks have outperformed value stocks in nine out of 11 years. That performance has largely been driven by the Federal Reserve’s low interest rate environment, though slow economic growth and muted inflation have also aided growth’s dominance. Lower interest rates boost the future value of money, which disproportionately increases the present value of growth companies’ equity and revenues.
Value: The Tortoise
If growth stocks are the hare, value stocks are the tortoise. Value stocks, which include a swath of financials, utilities and consumer staples, take a slow and steady approach.
Sometimes, they even win the race. Historically, value stocks have flourished in the latter part of economic downturns and early on in economic recoveries. We saw that dynamic in the last cycle: value stocks’ returns trumped growth stocks’ returns in 2012 (following the European debt crisis) and in 2016 (during China’s currency crisis).
Value stocks also tend to perform better in rising-rate environments that typically come with some form of inflation (think rising commodity prices).
From 2000 to 2008, value stocks beat growth stocks in seven out of nine years, and the 10-year yield averaged 4.58% over that stretch. Value’s best month versus growth in the last bull was October 2018 – the month in which the 10-year yield climbed to a seven-year high.
From February 19 to March 23, growth stocks dropped 32%, while value stocks fell almost 39%. Since then, growth stocks have bounced 33%, compared to value stocks’ 26% gain (as of May 7).
Right now, the rate environment is likely in growth’s corner. The Fed has cut interest rates to zero and promised to keep them there until the U.S. economy is well on its way to recovery, and the 10-year yield is near a record low.
More recently, value has had its moments in the sun, even if fleeting. In the week ending April 10, value stocks outperformed growth stocks by the most in six months as the 10-year yield jumped 0.12%. Growth stocks, however, outperformed value stocks the following week, though. Then, on May 1, growth investors were rattled when Amazon, a key component of the Russell 3000 Growth Index, reported first-quarter earnings that missed estimates, and management communicated a bleak profit outlook.
In our view, growth stocks may still have the upper hand over value stocks at this time. Not only are interest rates expected to remain low for the immediate future, inflation is projected to remain under 1.5% over the next five years. The world’s shift towards technology is accelerating now more than ever, which supports revenue and profit growth for these companies in a downturn. Additionally, growth stocks generally carry smaller debt burdens than value stocks, a favorable theme for investors.
If interest rates move higher, we could see value taking back the reins. Monetary and fiscal policymakers have set the groundwork by enacting trillions of dollars in stimulus and boosting the U.S. government’s borrowing to historically high levels. As we highlighted earlier, value stocks tend to do better when rates rise, and we don’t expect rates to go much lower from here.
Ally Invest customers are less enthusiastic about growth stocks’ prospects than what the trends in the broader market show. From March 23 to May 5, about 42% of Ally Invest customers’ trades in the FAANG (Facebook, Apple, Amazon, Netflix, Alphabet/Google) stocks were sells, compared to a 33% sale rate for all other equities on our platform.
For you, it may be more useful to evaluate which investing style best fits your goals and time horizon, rather than trying to pick the winner here. And if you’re searching for
more competition outside of the stock market this weekend, check out competitive marble racing.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.