The Growth/Value Cycle: Is Value Leading Again?

The Growth/Value Cycle: Is Value Leading Again?

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by Eddy Elfenbein, Crossing Wall Street

Every so often, I like to see where we are in the Growth/Value Cycle. This is a simple chart. I take the S&P 500 Value Index and divide it by the S&P 500 Growth Index.

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Let me caution you that this isn’t some deep metric of where the market is going. Instead, it’s a very general read on what the market has done.

The important point for investors to see is that the stock market generally moves in multi-year periods of favoring growth over value; then the opposite happens. Understanding this is important in beating the market. For the most part, growth leads when things are optimistic, and value becomes popular when people get scared. That’s pretty much basic human psychology.

This relationship has gotten a little out of balance lately because many banks were lumped in with value stocks. You can see how value did very well when the the Tech Bubble burst (making up for their lagging performance). But value never had its day in the sun following the financial crisis.

Value peaked against growth in May 2007, and it bottomed out last January. There were several false starts along the way. Now that value has been leading for nearly a year, I’m still not convinced that the value cycle has turned. Again, it was the bank rally that spurred the Value Index after the election, and that probably reflects newfound optimism for the economy. In other words, I’m not sure this metric measures what it used to.

 

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