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Volume 12, Edition 20 | June 19 – Junue 23, 2023

Is it Finally Value’s Turn?

Doug Walters, CFA
As we near the end of the first half of 2023, Growth stocks have enjoyed a stellar year, but the opportunity may be elsewhere.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

As we approach the end of the first half of 2023, Growth stocks look poised to notch another win versus their Value peers. But market leadership has been shallow (see Concentrating on Risk), and if you take a step back, there are additional reasons to be cautious about Growth stocks.

So far this year, the Russell 1000 Growth Index is up over 27%, dwarfing the 3% produced by the Russell 1000 Value Index. Is Value broken? No. It has been a challenging decade for Value, but the balance of opportunity currently appears to be tipping in Value’s favor. We’re not predicting the future; just looking at the data.

Let’s start with academics. Value is a proven persistent factor… meaning academics like Eugene Fama and Kenneth French have shown that, over time, stock valuation matters. Cheap stocks (Value) tend to outperform expensive stocks (Growth). That doesn’t mean that Value will always outperform, but over time it should.

Now let’s take a look at some empirical data. It turns out the recent outperformance of Growth is quite unusual. If we look at ten year rolling returns of Growth vs Value over the last century, Growth has only had two similar periods of significant outperformance: 1939 and 2000. The current bout of Growth outperformance may have already peaked. Since Aug 2020, Value has outperformed Growth.

So why does all of this matter? After the 1939 peak, Value rallied over 360% in the next decade, while Growth was up “only” about 100%1. Following the Dot Com peak in 2000, Value clawed out a 40% return over the subsequent decade, while Growth fell over 30%2.

There is no telling what will happen the rest of the year, but if the future even rhymes with the past, we would expect a good decade for Value relative to Growth.

1. Fama/French Growth and Value per Blackrock Student of the Market, June 2023
2. Russell 1000 Growth and Value total return
24.5%

Outperformance of Growth vs. Value this year

Growth stocks have outperformed Value by nearly 25% this year. Don’t give into FOMO, the opportunity going forward may be elsewhere.

Headline of the Week

Central Bank Divergence

Last week the Fed paused rate hikes. This week the Fed Chair was in front of Congress. The two headlines from the Wall Street Journal show an interesting tweak in messaging. The first day of testimony produced “Powell Says Interest-Rate Pause Is Likely Temporary.” The second day produced “Powell Says Interest Rates Likely to Rise Further.” Despite a press conference and two days on Capitol Hill, the market seems unconvinced of Fed intentions.

Turning briefly to a pugilistic headline, Musk vs. Zuckerberg gained interesting coverage as the two billionaires squared off over messaging apps. However, this billion-dollar weight class would be the undercard to the trillion-dollar slugfest if the Fed vs. Stock and Bond markets come to blows over the direction of the economy.

Meanwhile, across the pond, the Bank of England posted a half percent rate increase and signaled more to come (nothing “unlikely” about it). The ECB raised a more modest quarter of a percent and was also more definite about additional hikes. England is battling particularly sticky inflation while Europe technically has entered a recession. All three central banks face unique risks and are responding in different manners. Who gets inflation under control first remains the open question.

The Week Ahead

Another read on US and UK Gross Domestic Product, bank stress test results, and Personal Consumption Expenditures inflation will be the major releases next week.

A Game of Chicken

The Personal Consumption Expenditures (PCE) Index on Friday, along with Personal Income and Consumption reports, will be the fuel that drives the current game of chicken investors are playing with the Federal Reserve.

  • PCE is widely accepted as the main inflation gauge the Federal Reserve uses.
  • In the last report, the annual inflation number dipped to 4.7% but still nudged higher month over month by 0.4%.

Who’s Down with GDP? Yeah, You Know Me

Gross Domestic Product (GDP) in the United Kingdom and at home will have its final reading.

  • There should not be any changes as this is the third look at the US GDP, but we went from 1.1% in the preliminary number to 1.3% expansion on the back of the consumer on the second revision and now might be able to get that final number to 1.4%.
  • The UK narrowly avoided a negative number in the previous reads thanks to construction and manufacturing activity but stands in an awkward stage where the growth may be revised away on Friday.

Stressed Out

Since 2008, the results of bank stress tests have slowly lost their luster, but since the high-profile failure of several mid-size banks earlier this year, that luster may return.

  • The criteria for these tests were released in February.
  • Unfortunately, these tests will focus on the big banks, not the smaller regional ones more heavily affected by the sharp rate hikes.

Not the Star

Federal Reserve Chairman Powell will join the rest of global central bankers at a symposium in Portugal next week.

  • However, he will not be the star, unlike the previous two weeks.
  • European Central Bank President Christine Lagarde is expected to be the hot ticket as she controls the rates in 20 economies.
  • At the last policy meeting, Lagarde sounded more hawkish than expected, so language tweaks will be scrutinized.

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