July 16, 2020
By Peter Bower
The outperformance of the growth sector to the value sector has gotten extreme. It is historic and looks unsustainable. The difference for large caps is about 32%. Growth is up 15% and value is down almost 17%. The differences for mid-caps and small caps are almost as dramatic, approximately 18% and 24% respectively.
A difference makes sense in a growth constrained world where business cycle value stocks are impacted by shutdowns and other actions in response to the Coronavirus pandemic. However, these differences are a warning! The history of markets is that when there is such extreme performance divergence, a process of a reversal of that trend takes place; this is referred to as a reversion to the mean.
Yes, many of the growth favorites of today are beneficiaries of the current conditions, but at what price? Valuation doesn’t matter until it does – we may be close to such a realization. With vaccines for Covid-19 on the near horizon, it is plausible that investors may begin anticipating better economic conditions and turn their attention to many of the beaten down business cycle sensitive (value) stocks.
A shift may occur as a broadening out of performance or possibly selling of the prior recipients of attention and money and switching to the laggards. If this is going to happen, it should be soon. We love and own many terrific growth companies, but now is a time for caution. At Riverplace Capital we carry a balance between growth and value and may soon push that to more value and a little less growth. Don’t misunderstand, the Bull is not negative on the market’s prospects, just staying tuned into its internal dynamics. It is, after all, a market of stocks, not a monolith; stay steady, my friends.
the Lonely Bull
