Growth versus value during COVID-19
The fallout of the COVID-19 global pandemic on stock markets this year has been dramatic. The U.S. equity market (S&P 500) fell by more than 33 percent over the course of 23 trading days beginning in late February before ultimately rebounding to much higher levels. It has been interesting to observe how different segments of the broader stock market have performed in light of recent volatility – one of those being the substantial outperformance of growth stocks relative to value stocks, the continuation of a multi-year trend.
Historically, it is very common to see growth and value stocks either outperform or underperform each other over different periods of time, as well as see these differences persist for many years. However, it’s also true that the performance of growth and value stocks tend to converge over long periods of time. As the included chart reveals, the recent outperformance of growth stocks has been quite strong over the past several years, only becoming more pronounced this year during COVID-19. But when we look back over 25 years (and longer), the difference between growth and value becomes much less pronounced.
Frankly, it makes sense that growth and value stocks tend to converge on each other – performing similarly over very long periods of time. The total return potential of growth and value tends to be fairly similar in the aggregate – it’s just a matter of how those returns are generated. Growth companies tend to grow faster and reinvest their cash flows back into their businesses to generate higher future returns for their shareholders, while value companies tend to grow slower and payback more of their cash flows directly to their shareholders via share buybacks and dividends.
If you happen to own a large proportion of value-oriented companies that pay good dividends, you may be displeased with your recent performance results – perhaps wishing you owned nothing but technology stocks! However, if history is any guide (and it typically is), at some point we expect value stocks will lead the market and the differences between growth and value will once again collapse on each other.
While accounts should be individually managed and tailored to client’s unique goals and constraints, we also believe it is important to own companies across different segments of the market (growth and value), including reasonable diversification across the various sectors and industries of the economy. This gives you the balance necessary to maintain a productive portfolio.
Ian N. Breusch is the chief investment officer for The Sanibel Captiva Trust Company.