Everything has a cycle. Sometimes there are prolonged periods where large-caps stocks outperform mid-and small-caps, as has been the case for the past decade. Sometimes domestic stocks outperform international equities, which has been the case for the past decade as well. And sometimes, value investing outperforms growth.
To that end, I’ve noticed something curious happening right now, which could be nothing. Or it could be a signal of a cycle that is just starting to change.
Look at the price ratio of the iShares Russell 1000 Value ETF (NYSEARCA:IWD) relative to the iShares Russell 1000 Growth ETF (NYSEARCA:IWF). A rising ratio means value stocks are outperforming.
The ratio on the far right shows momentum is starting to pick up against growth stocks for value investors. I’d argue this is a long-time coming.
Tech stocks are expensive, and one of the biggest differentiators between the growth and value style of investing is sector composition. Value investing is far more focused on sectors like financials, industrials, and healthcare, while growth investing is overwhelmingly focused on technology. Top tech stocks look expensive, and I’d argue are vulnerable to meaningful declines. That alone would turn the value/growth ratio higher, but that would be more because tech stocks were falling further than financials, as an example.
I look at this and think it’s a bit ominous. We’ve all been waiting for value investing to work, but the implication here would be value stocks outperform simply by being down less if a bear market is in our near future. Now, of course, this doesn’t have to be the case. But I find it hard to believe that value would outperform to the upside with concerns mounting over currency volatility and higher-for-longer rates eventually slowing down the economy.
The Bottom Line on Value Stocks Here
There are other implications here which could be quite good for investors.
While it’s unclear if a growth-to-value rotation can happen in a bull market for U.S. equities, it certainly could mean international stocks become the better place to position for long-term gains.
For example, there’s a clear link between emerging market stocks performing well and value outperforming growth. In other words, while value making a comeback might be a problem for U.S. markets, it could be a tailwind for international ones.
Either way, I think the value/growth relationship is worth paying close attention to here.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
