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Growth vs Value Investing

The growth versus value investing debate remains heated. Both growth and value investors are passionate advocating the superiority of one investment style over the other. As we all know many value investors primarily invest in stocks that are selling at a discount to the market. These stocks often have lower P/E ratios and higher dividend yields. Growth investors, on the other hand, believe in investing in stocks that are growing faster than the overall stock market and have higher earnings growth stocks with little or low dividends.


It is common to expect growth stocks to excel when the economy is performing well. Surprisingly, growth stocks tend to outperform value stocks during the latter (mature) phase of a business cycle or just ahead an economic recession, at least from a relative perspective. Entering into a recession or an economic contraction growth and value stocks both decline in value. However, value stocks tend to relatively outperform growth as a recession deepens into a bear stock market decline.


From a performance basis as of 4/30/20, growth (i.e., S&P 500 Growth Index ETF – IVW) have decisively outperformed value (i.e., S&P 500 Value Index ETF – IVE) over the past 3-years (13.70% vs 3.37%), 5-years (12.17% vs 5.10%), and over the past 10-years (13.76% vs 8.91%). The growth outperformance cycle continues over the past 1-year (7.15% vs -6.79%).


Growth investors rely primarily on capital gains or price appreciation to generate total returns as growth stocks often pay low or no dividends. On the other hand, value investors focus heavily on higher dividend yields and lower price beta to offset the lower capital gains.


So, the question then becomes is it time for investors to consider value investing?


It is important for investors to understand the significance of the two investment styles as it pertains to sector allocations and stock positions. Why? Both of these investment style ETFs are market capitalization weighted indexes that is based on S&P Large-Cap 500 Growth Index (SGX) and S&P 500 Value Index (SVX). As a result, the largest S&P sectors and the largest market-cap S&P 500 stocks can exert undue influences on the directional trends of the two investment style ETFs (S&P 500 Growth – IVW and S&P 500 Value – IVE).


As of May 15, 2020 the sector composition of the S&P 500 Growth ETF (IVW) are as follows: Info Tech (39.14%), Consumer Discretionary (14.41), Communications Services (13.28), Healthcare (11.01), Industrials (6.71), Consumer Staples (4.67), Financials (4.59), Real Estate (2.52), Materials (2.52), Energy (0.74), and Utilities (0.67). The top 10 largest components of SGX by market capitalization are: MSFT (10%), AAPL (9.2), AMZN (7.18), FB (3.63), GOOG (2.94), GOOGL (2.94), V (2.25), MA (1.77%), NVDA (1.49), and NFLX (1.42).


As of May 15, 2020 the sector composition of the S&P 500 Value ETF (IVE) are as follows: Healthcare (22.17%), Financials (17.60), Consumer Staples (11.11), Info Tech (8.74), Industrials (8.47), Communication Services (7.98), Utilities (6.69), Energy (5.97), Consumer Discretionary (5.00), Materials (2.96), and Real Estate (2.94). The top 10 market-cap stocks in SVX are: BRKB (3.36%), UNH (2.80), JNJ (2.33), VZ (2.30), PFE (2.12), T (2.10), CSCO (1.91), WMT (1.81), XOM (1.80), and BAC (1.76).


A brief review of the two ETFs shows the greatest discrepancy between the two investment styles is the different sector allocations of several key S&P 500 sectors including the Technology, Financial, Communication Services, and Healthcare. It is also apparent that the top six market cap weight stocks in IVW (i.e., MSFT, AAPL, AMZN, FB, GOOGL, and GOOG) is almost identical to the top six market-cap stocks in S&P 500 Index (SPX). This would then support the premise that large-cap growth investing or namely large-cap Technology investing remain one of the primary drivers to the strong overall returns of the SPX Index as well as the NASDAQ NDX Index.


Technically speaking, S&P 500 Growth ETF (IVW – 194.41) continues to outperform S&P 500 Value ETF (IVE – 106.06) on a price basis as IVW has appreciated 38.48% from its 3/23/20 low as compared to IVE, which has gained 31.00% from its 3/23/20 low. Also, IVW has outperformed IVE on several key technical metrics including relative strength vs SPX (0.0658 vs 0.036), price momentum, and SCTR technical scoring (90.8 vs 33.7). IVW has also surpassed its 10-wk ma (177.29), 30-wk ma (186.97), and the pivotal 61.8% retracement (183.70) from Feb-Mar 2020 decline. The above technical developments reaffirm IVE’s leadership role and hint of a retest of its all-time time high of 210.47 (2/19/20).


Although IVE (106.06) has managed to find key support at 80.96 (3/23/20) rebounding above its 50% retracement (77.12) from the 2009-2020 rally it still needs to clear convincingly above its key intermediate-term resistance zone at 111.83 (61.8% retracement from Feb-Mar 2020 decline) as well as surpass its 30-wk ma (116.58) to confirm the start of a sustainable intermediate-term recovery. However, it is interesting to note the relative strength vs SPX technical indicator is nearing the pivotal Feb/Mar 2009 bottoms. The ability to maintain above this key support zone hints at the start of a deeply oversold rally, at least from a near-term perspective. Also, the MACD momentum indicator has fallen below its 2008 lows. This again hints of a deeply oversold condition. The SCTR technical score (33.7) is also declining rapidly toward its 2010/2017/2018 lows. The ability to find support can trigger an oversold rally.


In summary, the above analyses suggest the continued market leadership role of large-cap growth investing (IVW) over large-cap value investing (IVE). IVW appears headed toward a retest of its Feb 2020 all-time high. Although IVE is trading at deeply oversold levels and can also generate near-term technical oversold rallies to its 61.8% retracement from Feb-Mar 2020 decline and possibly to its 30-wk ma it is too early to confirm a sustainable intermediate-to-longer term shift in relative performances from large-cap value growth investing toward large-cap growth value investing.


Nonetheless, we will be closely monitoring the IVW/IVE ratio analysis for technical signs of a pendulum shift from one investment style to the next. Note the large-cap growth (IVW) to large-cap value (IVE) ratio is at 1.906. This is the highest reading recorded and has just surpassed the 2000 Tech/Telecom cycle high when the ratio traded to 1.853. Is this a major technical breakout signaling the start of the next major outperformance cycle in Growth over Value and in particular Secular/Structural Growth stocks? Or is this a warning of a deeply overbought condition in the Growth vs Value cycle?


For your review, attached below are the S&P 500 Growth ETF (IVW), S&P 500 Value ETF (IVE), and IVW/IVE ratio analysis.



Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courttesy of StockCharts.com

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