Growth stocks are beating value, how much longer can this last?

Sir Isaac Newton coined the phrase "what goes up, must come down." Though he was describing the effects of gravity, for anyone that has been an investor for long enough, knows he could very well have been describing the stock market. I suppose the one piece of information that would have been more helpful is "when". Alas, all we can do is look back at history as a guide going forward. And if history is any guide, the trend of growth stocks - think tech companies - beating value stocks (think boring banks and oil companies) is raising some eyebrows, mainly because of this chart:

The chart above shows the performance of large-cap value stocks vs. large cap growth stocks, you can easily see the disparity between the two has gone on for some time. I think this mainly has to do with the growth of FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks. The so-called FAANG stocks made up roughly 6% of the S&P 500 in 2013, but now account for almost 12%, see below:

Of course no one knows for sure when this trend of growth trumpeting value will change, if at all. But if we look further back, we can see the history of value beating growth stocks:

In the chart above, the falling line denotes the years where value outperformed growth. One can clearly see the trend from 2000 to 2007 of value stocks outperforming growth. If history is any guide, there are two lessons here: 1. No trend lasts forever 2. A trend can last a very long time, several years in fact. Usually I find a trend changes right about at the point of ultimate euphoria or complete capitulation. Either investors get too excited and buy into a trend too late or they get too upset at their losses or have fear of "missing out" that they sell at the bottom and buy into a top. Those are two trends that will wreak havoc on a portfolio. I am not a market prognosticator, I am merely pointing out the trends and making investors who may have been too comfortable with owning tech for too long of the possibilities.

What is more interesting to me is the long term trend of value stocks relative to growth. Fidelity compared the two over a 26 year time frame and found U.S. Value stocks outperformed growth stocks on an average annualized basis of 9.03% to 8.60%, a difference of .53%. That might not sound like a lot, but assuming a $10,000 initial investment, the value portfolio would have grown to $94,694 vs $85,435 in the growth portfolio. That is meaningful. What is also interesting is the risk. The 26 year standard deviation of the value portfolio was 16.67 vs 21.42 for growth, the lower the standard deviation the less variability in returns or potential for downward movement in the portfolio. In effect, value stocks achieved a better return with less risk. To see the full study click here: https://www.fidelity.com/learning-center/trading-investing/trading/value-investing-vs-growth-investing

Hope this helps, or should I say, I hope you see the value in this. For more information on me and my company please visit my website at www.michaelaloi.com or email me at [email protected].