With U.S. stocks once again hitting all-time highs investors are looking for a catch-up trade or at least an investment that isn’t trading at obscene multiples. Growth has been the hands down winner for the last decade but investors often forget that prior to the financial crisis, value outperformed for 7 years.
(IVW) Growth vs (IVE) Value Relative to S&P 500 – 20 Years
The Federal Reserve’s own form of financial engineering, quantitative easing introduced an era of cheap money. Growth became the investment du jour outpacing its value brothers and sisters nearly 2:1. Growth often trades at a premium when it’s scarce and today despite revenue being up marginally year on year, 2019 earnings growth looks to end the year flat to up fractionally.
(XSW) Software ETF vs S&P 500 – 5 Years
Software deserves a deeper dive but one look into this popular trade points to why growth may be hitting a ceiling. The SPDR software ETF [
WorkDay (WDAY) Earnings GAAP vs Non-GAAP
High flying stocks like WorkDay [
The Worm Has Turned
Back to today’s theme, Growth vs Value. Let’s go to the charts. Over the last year Growth [
U.S. Yield Curve
Let’s look at another chart to help explain why Financials have suddenly caught the eyes of investors. Just a few months ago the yield curve was deeply inverted with the long end of the curve collapsing on the heels of slowing global growth and PMI data falling below 50 indicating a contraction in manufacturing. Recession became the base case with stocks struggling as investors flocked into treasuries [
Financials (XLF) vs the S&P 500 YTD
A month later after the third of three 25 basis point cuts by the Fed the yield curve is looking a whole lot better. The steeper curve helps net interest margins a key component for bank profitability. For many, JP Morgan [
It’s not just U.S. value stocks that are catching a bid but as pointed out in the Wall Street Journal, investors have turned to other unloved assets as well. Emerging markets and Europe trade at significant discounts to the S&P and with good reason. Slower growth and markets with questionable investor protection always deserve a discount but like most things in life there are limits. Growth At the Right Price has turned into Growth At Any Price and therein lies the problem. Reversion to the mean is a powerful force and for the moment investors want something more than playing the role of the greater fool.
*At the time of this article some funds managed by David Nelson were long JPM, MS, TLT & GLD
Equities Contributor: David Nelson, CFA CMT
Source: Equities News