“Nowadays people know the price of everything and the value of nothing.”
…Oscar Wilde, The Picture of Dorian Gray
I have always been an avid reader, and that fact has only intensified over the last few years as Amazon has made it WAY too easy to buy books. Growing up, my family never had much money, but I always had a library card, and some of my fondest childhood memories involve going to the public library and coming home with a huge stack of books and a smile on my face, in absolute disbelief that the system just allowed a person to take so many for free. These days I don’t have as much time to read as I would like, but I have been trying my best to get through many of the classics that I have bypassed over the years, which is how I came to be reading The Picture of Dorian Gray by Oscar Wilde over the weekend. The quote above, which I’m fairly certain I have heard before, really stuck out to me while reading, though, and reminded me of the chart I presented in our “Charts of the Week” publication several weeks ago that pointed out that Value stocks might have been overdue for a period of outperformance.
The stock market can be carved up in many different ways, but one popular method is to divide the market between growth stocks, which typically grow their earnings at higher rates and put more capital back into their businesses, and value stocks, which have strong fundamentals but may be trading at a discount to intrinsic value or other benchmarks. Over the last few years, it has mostly been the growth stocks that have outperformed, as the straight-up action in the indices has not really allowed for many value opportunities across the broad market. However, the volatility experienced over the last few months has sufficiently beaten down many quality companies to the point that value does now exist, which is why I thought we may finally see money start to flow back into these value stocks at the expense of the more growth-oriented ones. That dynamic appears to be playing out this year, too, when judged by the relative strength chart comparing the Russell 3000 Growth Index and the Russell 3000 Value Index, which has swung back in favor of the latter for most of this year.
When the line on this chart goes up, growth is outperforming value, and when the line goes down, the opposite is occurring. So I believe this Oscar Wilde quote still very much applies to today’s stock market, as we tend to be so focused on the day-to-day price movements that it is easy to overlook the underlying value of both the broad market and individual stocks. Speaking to the value of the S&P 500, we have long said that the market isn’t cheap, but we don’t consider it all that expensive either, especially considering that this low interest rate environment is not really providing a viable alternative for most investors. With the 10-Year U.S. Treasury rate still only paying about 1.85% per year, the value of owning stocks increases due to their upside potential as investors seek out the best return for their given level of risk. And while the S&P 500 is now bumping up against the key resistance area of 1993-2000 that could force this rally to take a breath, interest rates are going to stay accommodative for the foreseeable future, which should help investors continue to see the value in owning stocks.
Andrew Adams, CMT joined Raymond James in 2008 and serves as the research associate to chief investment strategist Jeff Saut and chief economist Scott J. Brown, Ph.D. He focuses on macro investment strategy, with an emphasis on technical and quantitative analysis of the global markets.