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.
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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