One of the truly frustrating elements of this market environment has been the lack of any sanctuary. Large cap, small cap, growth, value, international — you name it — it’s all collapsed. From time to time, there have been various degrees of pain, but by year-end, there was little to distinguish the performance of one asset class with another.
This calendar year we are seeing a significant divergence between the performance of growth and value stocks. The chart below illustrates this by comparing the relative performance of the Russell 3000 Growth and Value Indices.
The upper pane shows the performance of both indices since the beginning of 2008, but the lower pane tells the story more effectively. This line is derived by dividing the Russell 3000 Growth Index by the Value Index. A rising line indicates outperformance by growth while a falling line reflects value outperformance. While dominance shifted back and forth last year, Growth has taken a decided lead this year, outperforming by about 1200 basis points.
Some of this simply reflects the position that the financial services industry holds in the Value index. However, there’s also reasons to believe this outperformance may be sustainable:
- The premium P/E of the Growth Index over the P/E of the Value Index is relatively small (as of last month’s end, P/Es of 11.64 for growth versus 9.87 for value, excluding negative earnings)
- A slow growth economy, the most likely path of any recovery in our age of crippled lending institutions and restrained consumers, generally attracts capital to those companies with an actual ability to grow
- These trends tend to follow long cycles, and apart from an aborted start in 2007, we haven’t seen growth dominance since 1999.
Everyone in the industry has gotten away from trying to call bottoms — there are only so many “falling knives” that you can catch (although I do take heart from the fact that the Russell 3000 has so far held its November lows) . However, it is important to try to align portfolios in advance of that new bull market which will eventually materialize.