Liz Looks at: Growth vs Value

Winner Takes Half

To follow market patterns lately is to watch mixed signals flicker like a flame. Much of the mix up has to do with the narrative around inflation and whether it’s just here for a good time or here for a long time. What this is doing is making investors think they need to make a choice between competing schools of thought when positioning portfolios.

Growth, Value, Both, or None?

Perhaps the most over-discussed choice is the one between growth stocks and value stocks. It is true that growth stocks are more sensitive to interest rates and yield curve movements (particularly movements in the US 10-year Treasury yield). This is because they are dependent on long-term growth prospects, and so a rise in long-term yields tends to put pressure on growth stocks. On the other hand, value stocks are typically more well-insulated from rate rises—and could even benefit from them in the case of financials.

It should be a simple choice then, right? If rates go up, value has more opportunity; if rates stay low or go down, growth has more opportunity. Problem is, rates aren’t doing what many thought they would, and setting expectations for where rates will go over the next three, six, or nine months is proving to be quite the puzzle.

The Jagged Yield Path

At the end of last year, the 10-year yield was 0.91%; as of this writing it sits at 1.35%. That’s a 48% increase! But the path to that point has not been a straight line. For example, over the period from March 31, 2021, to July 14, 2021, the yield dropped from 1.74% to 1.35%, a decrease of 22%. The ICE BofA MOVE Index, which measures yield curve volatility, is up 17% YTD. That’s a tough pattern to follow.

Even more tricky to decipher is the equity market’s reaction to this rise in yields. Growth and value stocks are almost dead even YTD. Through July 14 the Russell 1000 Value Index is up 15.9% and the Russell 1000 Growth Index is up 15.3%.

The choice isn’t easy. The good news is, I don’t think making a definitive choice is the best approach. I also don’t think rates are the be-all and end-all decision factor, and investors should focus more on a company’s quality, fundamentals, and earnings strength in this environment.

The Second Year of a Bull Market

Given the economic strength that’s expected to come, the broader market still has upside potential. But to set realistic expectations, the second year of a bull market typically produces lower returns than year one. To be exact, over the prior 13 bull markets the first-year average return on the S&P 500 was 49%, whereas the second-year average return was 11%.

Even with less robust overall returns, solid investment opportunities can be found in both growth and value, and there may not be a clear winner come year-end, but that doesn’t mean one of them loses.

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