- Value stocks — which generally have stable fundamentals and low multiples — have outperformed their growth counterparts in September.
- The outperformance in value this month caught many by surprise as growth has generally outperformed in recent years.
- However, investors hoping September is a turning point for value over growth might be disappointed as the macroeconomic backdrop still favors growth stocks.
Investors are not ready to call this month's surge in value stocks a turning point for the depressed area of the market.
Value stocks — which generally have stable fundamentals and low multiples — have outperformed their growth counterparts in September. The iShares Edge MSCI USA Value Factor ETF (VLUE) gained more than 4% in September. Meanwhile, the iShares Edge MSCI USA Momentum Factor ETF (MTUM) has dropped 1.5% in in that time.
The outperformance in value this month caught many by surprise as growth has generally outperformed in recent years. However, investors hoping September is a turning point for value over growth might be disappointed as the macroeconomic backdrop still favors growth stocks such as Facebook, Amazon, Netflix and Google-parent Alphabet.
"It's been the right environment for growth stocks," said Mark Giambrone, one of the managers of American Beacon Large Cap Value fund (AADEX). "I'm not sure if this is a sustainable turn or not."
So-called growth stocks, those defined by their high growth expectations relative to the market, have driven the lion's share of Wall Street's gains since the end of the financial crisis. The SPDR S&P Growth ETF (SPYG) has skyrocketed more than 400% since the March 2009 bottom. In that time, the SPDR S&P 500 Value ETF (SPYV) is up around 250%. The VLUE exchange-traded fund, meanwhile, has lagged MTUM on a monthly basis 61% of the time since their launch in mid-2013.
One key factor driving growth's outperformance over value is monetary stimulus from the Federal Reserve. The Fed cut interest rates to zero after the crisis and have kept them near historical lows since then. Earlier this month, the Fed lowered rates for the second time this year.
Lower rates make it cheaper for companies to borrow money for buybacks or expand their businesses. Growth stocks get a bigger boost from easier policy than value as those companies are more likely to use leverage to expand their businesses.
But Jeff Germain, a director at Brandes Investment Partners, thinks the spread between growth and value got so wide entering this month that it had to snap back.
"At some point, valuation becomes its own catalyst. The spread gets too wide and the market rotates," Germain said. "The spread between value and glamour growth is the widest it's ever been. When you look historically, when spreads are that wide, something gives."
Still, the Fed and other central banks are likely to keep monetary policy easy for the foreseeable future, dampening hope that value's outperformance in September may be short lived.
The European Central Bank cut rates earlier this month and launched an asset-purchasing program of 20 billion euro per month. China's central bank also issued additional measures to stimulate the country's economy.
"The chances of this being the real deal are relatively low," said Mark Finn, manager of the T. Rowe Price Value fund (TRPIX). "The central banks are loathe to let us fall back into recession or let the market have a meaningful sell-off. We're in this slow-growth period for a while as the Fed eases and the ECB eases and China eases. In that kind of environment, investors gravitate to quality and lower-volatility earnings streams, and that's just not value."
Some Wall Street strategists also believe value's rise against growth may have been driven by a sudden stop in tax-loss harvesting. Investors often sell losing stocks to lower their tax bill, a technical move at the center of momentum trading. Speculation earlier this month over a cut in capital gains taxes from the Trump administration may have ebbed tax-loss selling.
Others pointed to a surge in Treasury yields which boosted financial stocks, some of which hold large chunks of weight within value indexes. The benchmark 10-year note yield is up about 20 basis points from 1.5% to about 1.7%. The surge in yields led to a 4.4% rally in the financials sector for September.
September may not be a turning point for value versus growth, but some investors, including Giambrone and Germain, think the tide will turn in value's favor at some point.
"It's not a question of if it ever turns; it's a question of when it will turn," Giambrone said, noting the Uber initial public offering earlier this year along with the chaos preceding WeWork pulling its IPO may be signs of "overextension" in growth. Uber is down more than 30% from its IPO price of $45 per share. WeWork officially pulled its IPO on Monday.
"The reality is we're at a very stretched period," said Giambrone. "The backdrop is fine, but backdrops can change. When they change and there is concern over that, what you find is the market can change fairly quickly as well."
Germain, meanwhile, thinks lowered-valued stocks will ultimately become too attractive on a valuation basis for investors to pass on them. He acknowledged, however: "The environment we're living in has had a number of head fakes."