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Maintaining Value Overweight Despite Growth Rebound

Maintaining Value Overweight Despite Growth Rebound

June 25, 2021
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As growth-style stocks extend their recent rally relative to value, we’ve been increasingly asked whether the value rally in place since September 2020 is durable. In short, we think that it is.

Factors still supporting value? Above-trend economic growth that we expect to extend through 2022; the prospect of higher interest rates due to economic improvement and higher inflation; a strong earnings picture; and valuations that still look fairly cheap versus growth stocks relative to history.

“With the growth reversal somewhat overextended near term and technical support in play, we are looking for this to be a potential rally point for value as the fundamentals reassert themselves,” commented LPL Research Chief Market Strategist Ryan Detrick.

As shown in the LPL Chart of the Day, the medium-term trend favoring value that started in September 2020 is still intact, but growth has rallied strongly relative to value since mid-May. (In the chart, the relative strength trending higher indicates outperformance by the Russell 1000 Growth Index relative to the Russell 1000 Value Index.) Several technical factors favor value potentially reasserting itself. Both the 200-day moving average and proximity to recent highs can act as price levels that potentially pull traders back in to the value trade. In addition, near-term conditions for growth stocks relative to value are now overbought, as measured by the relative strength index (RSI) technical indicator seen in the bottom panel.

View enlarged chart.

Longer-term conditions may also favor value. Since 2000, the relative performance of growth versus value has gone through two major phases: between 2000 and 2006 value mostly outperformed; since then growth has mostly outperformed. It has essentially taken since 2006 for the value rally between 2000 and 2006 to completely unwind. At the same time, that puts the relative strength between the styles at the long-term support point from the end of the tech bubble. The long-term underperformance trend is a contributor to historically attractive valuations for value relative to growth.

While we favor value looking at least to the end of the year, we still see long-term secular trends that may favor the technology-oriented growth stocks in the long run and don’t believe in an inherent value premium, but neither do we believe that growth will outperform value most of the time. It’s all about the economic and market environment despite growth stocks outperforming value for most of the last fifteen years. Given current conditions, we still believe fundamentals favor value stocks right now, as does the technical trend despite the recent growth rally.

 

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from Bloomberg. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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