• A sustained switch in outperformance from growth to value would be right about on time, as this see-saw reversed about every decade the last few occurrences, starting more or less on the zeros. After heading south in late 2009, the Russell 3000 growth index, relative to the Russell 3000 value index, troughed in early 2009, and then marched upward, reaching a peak in late 2020. That’s when the S&P 500 pure growth relative to S&P 500 pure value started declining, and the sectors most emblematic of each respectively, technology and financials, followed this pattern in lockstep. The uptick in value in the past few months could be a continuation of this decade-congruent pattern. Client talking point: A return to value outperformance would be history rhyming.
This is not to say that some growth stocks, particularly growth tech, won’t do well over the next few years, but if the current trend continues, it will be increasingly difficult to pick winners in this category. No longer the beneficiaries of the 21st century version of irrational exuberance, these stocks will rely more on old-fashioned values to drive prices: ROE/ROIC, margin and free cash flow growth, Strategas notes.
And the post-pandemic penchant for buying growth tech companies that are all potential and no earnings will once again be viewed as frivolous rather than opportunistic.
For growth-inclined advisors, success in the more normal market will mean doing the hard work to identify young tech companies that hold promise to be outliers—a status typically signaled by inflows of adroit institutional money. This involves understanding these young companies’ specific roles in the next phases of the digital revolution, the economic force that will play strong role in pushing up the Dow in the late 2020s. Thus, the calf we’re likely to see in a couple years will likely grow into bull later this decade.
These points above might help prepare your clients for market normalcy. But for hard-core bulls addicted to growth, you might pull out some charts illustrating the tech crash of 2000, when a NASDAQ propped up by capital-guzzling, profitless dot-coms crashed, reviving quaint notions of positive earnings growth and true equity appreciation.
David Sheaff Gilreath, CFP, is a 40-year veteran of the financial service industry. He is the chief investment officer of Innovative Portfolios, an institutional money management firm, and Sheaff Brock Investment Advisors LLC, which handles portfolios for individual investor clients. Based in Indianapolis, the firms manage over $1 billion in assets from clients nationwide.