John Rothe - John Rothe | Stock Market and Investment Research

Value vs Growth: Is A Decade of Value Leadership Coming?

After the tumultuous stock market swings of this year, many investors are starting to re-evaluate their portfolios and are wondering Value vs Growth, which will outperform going forward?

Since the Great Financial Crisis of 2008-2009, growth stocks have significantly outperformed their value counterparts.

However, the tides may be turning after rising interest rates and a strong US dollar have had a significantly negative impact on some of the leading names within the technology sector.

FANNG Stocks

As interest rates rose during 2022, the so-called darlings of the technology sector, often referred to as FANNG stocks, saw large price declines since their January 2022 peak.

Investopedia / Ryan Oakley

The NYSE FANG + Index is an index that tracks the performance of 10 highly-traded growth stocks of technology and tech-enabled companies in the technology, media & communications, and consumer discretionary sectors.

The index includes FANNG stocks (Meta/Facebook, Amazon, Netflix, and Alphabet/Google), and is unique in that it also includes some of the other Wall Street darlings. such as Tesla (TSLA) and NVIDA (NVDA).

From its peak in January 2022 to its low in November 2022, the NYSE FANG+ Index declined nearly 50%.

Some FANNG stocks saw even larger declines than the index itself.

META (formerly Facebook)

Meta saw approximately a 77% decline in price:

Amazon (AMZN)

Amazon saw approximately a 57% decline in price:

Netflix (NFLX)

Netflix saw approximately a 76% decline in price:

Growth Leadership Pre-2022

From March 2009 to January 2022, the S&P 500 Growth Index (using the ETF “SPYG” as a proxy), had a total return of approximately 913%.

Meanwhile, during the same period, Value (using the ETF “SPYV” as a proxy) returned approximately 388%.

During this time we saw the Technology sector balloon up to 25% of the S&P 500 index. 38% if we include the Communications Sector. No wonder investors were quick to exit the tech sector.

Data source: State Street

Value vs Growth Leadership?

However, this outperformance of growth stocks may be ending — and potentially starting a decade of outperformance from their value counterparts.

Since the November lows, the relationship between Growth and Value names has traded place.

If we take a look at the relative strength comparison between S&P 500 Value and S&P 500 Growth, we can see that after the Tech Collapse in 2000-2001, Value stocks outperformed Growth stocks on a relative basis up until the Great Financial Crisis.

After 2009, Value underperformed Growth — until the stock market lows in November 2022.

Will Value Stocks Continue to Outperform Growth?

Simply looking at the trend comparison between Growth and Value, it can be easy to say “yes”.

But, let’s take a deeper look.

Value companies, which tend to generate profits in the short term, may be less affected by fluctuations in interest rates and inflation than growth companies, which focus on long-term profits.

Changes in interest rates have also created opportunities for active investors to find undervalued stocks with strong fundamentals, which may see an increase in value as investors recognize their potential.

“During higher inflation environments, investors tend to rotate away from growth into value as present income and strong cash flows become more important,” Sherifa Issifu, associate, index investment strategy at S&P Dow Jones Indices.”

Source: S&P 500 Global Market Intelligence

To further the impact of rising interest rates on growth stocks, a lot of investors and research analysts rely on the Net Present Value (NPV) model.

The NPV model discounts projected cash flows to the present using a discount rate, which is typically the 10-year Treasury yield.

So, as interest rates rise, the companies with greater cash flows may look more attractive to investors.

For now, investors should keep an eye on the relative relationship between Growth and Value stocks to help them get a better understanding of where the broader market’s inflows and outflows are.

-John Rothe, CMT

Is International Finally Ready to Shine?

by John Rothe | Economic Research, Investment Research

Over the past decade, U.S. investors benefitted significantly by investing at home rather than abroad, as U.S. stocks significantly outperformed their international counterparts. As illustrated in Figure 1, an initial investment of $1,000 in the S&P 500 at the end of 2012 grew to $2,613, excluding dividends, by the end of 2022.

For comparison, the same $1,000 investment in the MSCI Developed Market Index returned only $1,142, while a $1,000 investment in the MSCI Emerging Market Index posted a loss and returned $842.

Looking back at the last decade, investment analysts attribute the outperformance of U.S. stocks to several factors. One major contributing factor is the composition of the S&P 500 Index, which is heavily weighted towards technology and other growth-oriented stocks such as Apple, Amazon, Microsoft, Google, and Tesla.

This high concentration of technology stocks is not found anywhere else around the world, and as the group outperformed, so did the broader U.S. stock market. Additionally, the U.S. dollar strengthened by approximately 30% over the last decade, which decreased the value of foreign investments when translated back into U.S. dollars.

These two catalysts benefitted U.S. stocks while acting as a headwind for international stocks.

Today international stocks currently trade at more attractive valuations than U.S. stocks after a decade of underperformance. As illustrated in Figure 2, U.S. stocks trade at a higher next 12-month price-to-earnings multiple than international stocks. In addition, U.S. stocks trade more expensive against their historical valuation range, as evidenced by the 10^th to 90^th percentile range of historical price-to-earnings multiples.

Given the current valuation backdrop, growth stocks’ underperformance in 2022, and recent U.S. dollar weakness, international stocks may become more of a focus for investors in 2023.

Is This Time Different?

by John Rothe | Investment Research

While doing my daily chart review, I noticed an interesting change within the S&P 500 taking place.

The S&P 500 is clearly still in a downtrend as marked by the red, downward trend line.

But notice the MACD; in the past, the MACD had already formed a buy signal — well before the index “touched” the downward trend line.

This time around, we have a newly formed MACD buy signal as the S&P 500 approaches the trendline.

Is having a not-so-aged MACD buy signal a telling sign that investors are thinking the market will break above the trend? Only time will tell.

For now, it’s just one interesting observation of many.

Stocks Trade Higher for a Second Consecutive Month

by John Rothe | Investment Research

Monthly Market Summary

The S&P 500 Index returned +5.6% during November, outperforming the Russell 2000 Index’s +2.2% return.
Cyclical sectors outperformed during November, with Materials (+11.7%) and Industrials (+7.8%), the top two sectors. Energy (+1.3%) was the worst-performing sector as the price of oil declined -6.9%, followed by Consumer Discretionary (+1.5%), which was weighed down by Tesla’s underperformance.
Corporate investment grade bonds generated a +6.6% total return, significantly outperforming corporate high-yield bonds’ +3.4% total return.
The MSCI EAFE Index of global developed market stocks returned +13.2%, underperforming the MSCI Emerging Market Index’s +15.6% return.

Stocks & Bonds Trade Higher After Encouraging October Inflation Report

Stocks traded higher for a second consecutive month after another encouraging inflation report. Data showed the Consumer Price Index (CPI), which measures inflation, increased +0.4% month-over-month during October. While October’s +0.4% reading was a repeat of September’s +0.4%, it was below the market’s +0.6% estimate. Compared to October 2021, the CPI increased by +7.8% year-over-year.

It was the slowest annual pace of inflation since January 2022 and the fourth consecutive month that the pace of inflation slowed from the prior month. Investors cheered the report as fresh evidence that price pressures are easing after a period of high inflation.

The top story in the bond market was falling Treasury yields as investors wagered that a drop in inflation will allow the Federal Reserve to slow its interest rate hikes. Bonds traded higher as interest rates declined, and the U.S. Bond Aggregate generated a +3.8% total return.

The equity market also traded higher, and the S&P 500 followed up October’s +8.1% rally with another +3.6% gain during November. International stocks joined in on the rally and significantly outperformed U.S. equities as the U.S. dollar weakened. Overall, November was a strong month across asset classes.

Market Internals Highlight Broad Participation During November

A look beyond the S&P 500’s headline return reveals strong market breadth. Breadth measures underlying strength or weakness based on the number of stocks advancing or declining and can be used to analyze market trends. A rising index with strong breadth indicates a large group of stocks participated in the index’s rise, while weak breadth indicates fewer stocks participated.

During November, eight out of the eleven S&P 500 sectors outperformed the broad S&P 500 index.

In addition, 425 of the S&P 500’s 503 constituents traded higher during November. This data suggests investors are becoming more confident in the path forward. While it is encouraging to see such broad participation, markets will ultimately be looking for incoming economic data to support the latest rally.