The stock market is getting ready to shift gears – away from growth and towards value.
So far in 2024, growth stocks have outperformed value stocks by a wide margin. The S&P 500 Growth Fund (SPYG) is up 23%. The S&P 500 Value Fund (SPYV) is up just 5%.
This is the widest performance discrepancy we’ve seen since the “free money” days of 2021 – when short term interest rates were 0%. Investors are dumping their under-performing value stocks, and they’re chasing the out-performing growth stocks higher.
The proverbial rubber band, though, is getting quite stretched. It is approaching the point at which it is likely to snap-back.
No Longer a Good Time for Growth Stocks
Take a look at this ratio chart comparing the S&P 500 growth fund to the value fund…
In a perfectly balanced world, this ratio would be at 1.00. Growth stocks and value stocks would be moving up and down together at the same rate.
At the current 1.62 reading, growth stocks are elevated compared to value stocks – by a wide margin. We’re overdue for a move in the other direction, causing the ratio to drift back down.
That will happen if the growth stocks sell off, or if the value stocks rally and play “catch up,” or if we get some combination of the two.
The last time the ratio was as elevated as it is today was back in 2022. That was a tough year for the stock market. The S&P 500 Growth Fund (SPYG) lost 33%, while the Value Fund (SPYV) lost 5%.
The relative outperformance of value over growth helped to bring the ratio back down toward a neutral level.
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For most of 2023, though, and for all of 2024 so far, growth stocks have been crushing the performance of value stocks. It’s like comparing the action in Nvidia (NVDA), which is up 150% this year, to that of ExxonMobil (XOM), which is up 9%.
Of course, the ratio could rally even higher from here. Rubber bands can often stretch farther than we think. The highest this ratio has ever been was 1.82 (at the end of 2021). So, it’s possible that growth stocks can get even stronger, and value stocks can get even weaker.
But, as this ratio presses higher, the risks of buying growth stocks increases. And, the relative attractiveness of value stocks increases as well.
At some point, the market will shift to favoring value over growth. Folks who are looking to put more money into the stock market today should consider getting in front of that shift.
Best regards and good trading,
Jeff Clark
Editor, Market Minute