The value-stock train has had quite a run, but the momentum has to end sometime. As always, the question is when?
We don’t have a clue, but we do have eyes in our head and so we can watch the numbers. And those numbers have started catching the attention of more than a few pundits of late. Consider that the Russell 1000 Growth Index (a measure of large-cap “growth” stocks in the U.S.) has started showing signs of relative lethargy compared to its value counterpart (Russell 1000 Value). Year-to-date, for example, Russell 1000 Growth (R1000G) is down 0.1% through June 2, according to Frank Russell Company’s returns calculator. Meanwhile, the Russell 1000 Value Index (R1000V) is up 1.7% through June 2.
It’s any one’s guess if growth is making a comeback relative to value. If it is, it’s been a long time coming. Growth has taken a back seat to value for the most part since the great collapse of stock prices after the Internet-stock bubble. Consider that for the five years through June 2, R1000V is up an annualized 5% on a total return basis vs. a –9.8% per year for R1000G.
The implication behind value’s long-running outperformance over growth is that it’s better to err on the side of caution. Value stocks are thought to be safer by association with undervaluation. Growth stocks, on the other hand, live up to their name, which is why they were the relative favorite in the late-1990s: R1000G posted a five-year annualized return of 32.4% through December 31, 1999 vs. 23.1% for R1000V. Today, either record looks alluring, but in the Go-Go 1990s, trailing by an annualized 1,000 basis points was unforgivable.
So-called style indexes (value and growth) usually run through cycles, with one besting the other for a time until the trend turns. It’s hard to know exactly when the trend turns except in hindsight. Nevertheless, Russell notes in a press release last week that “growth stocks outpaced their value counterparts in May at every capitalization tier.” That’s the first month that value beat growth since December and only the second time in the past calendar year.
Adding to the growth-is-making-a-comeback mentality is the fact that tech stocks led the rally in May. Within the big-cap Russell 1000, technology was the clear sector winner last month, rising 8.5%.
But is this how an extended rally in growth relative to value begins? Mr. Market arguably isn’t yet convinced. As CNN Money columnist Michael Sivy today advises, “Growth stocks are trading below their historical valuations, while value stocks are above their norms. Investors either expect a slump or feel the odds are scary enough to require defensive stockpicking.”
Trends change one tick at a time, although one could be forgiven for expecting that a return to growth’s dominance would be accompanied by corroborating evidence in the economy. Do we have that in the “slow, steady growth and stable inflation and interest rates….” that now prevails, according to Sivy? Indeed, that’s fertile ground for growth stocks, and the fact that there’s a fair amount of “undervaluation” only sweetens the deal, he notes.
But didn’t the fixed-income set last week send a message that economic growth is slowing, and therefore the Federal Reserve will soon stop raising interest rates? Indeed, the bond market today stands by its prediction by keeping the yield on the benchmark Treasury Note under 4%. That’s the fifth consecutive day of closing the session on the 10 year below 4%, a signpost that hasn’t occurred in more than a year.
It’s no surprise to find that the stock market, in this case growth stocks, disagree with bonds. Nonetheless, the current dispute in outlook is particularly inopportune for investors trying to discern if growth stocks are set for relative, if not absolute, outperformance after a long stretch in the performance desert.
It didn’t help that there were few distinctions today within the various corners of the stock market. Stocks were virtually higher across the board by capitalization and style. Nor to the reasons for the buying lend much insight: catalysts included a dip in crude oil prices and speculation that Fed Chairman Alan Greenspan will lend support in testimony to Congress on Thursday.
If you’re having trouble trying to where financial enlightenment lies, and which prediction rings hollow, you’re not alone. Last week, Stephen Roach, chief economist at Morgan Stanley and long-running bear on fixed-income securities, confided in a research note that he was “rethinking” his outlook on bonds. “I have long been torn between bearish and bullish forces on the bond market outlook.” As such, he “suspects” that bond yields will remain low for some time. Perhaps they’ll even drift lower. There are risks to his forecast, but that’s his story for the moment and he’s sticking to it.
But while the yield on the 10-year threatens lower realms, the Fed has been hiking short-term rates (until recently, anyway). But confusion and indifference reign supreme on the short end of the yield curve nevertheless. Despite a sharp rise in money market yields over the past year, investors are less than enthused. “U.S. money market funds are struggling to attract investor dollars despite rising yields, in part because of investors’ high-risk appetite for long-dated bonds, analysts and fund managers said on Monday,” Reuters reports today.
Even the Fed’s power to move assets to money markets is in question these days. By that measure, is it any wonder that investors generally are bewildered? In any case, be nice. If you see someone wandering aimlessly down Wall Street, be a pal and direct him to a coffee shop (or a good psychotherapist).