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Value over Growth?

The growth and value debate remains heated, at least from a long-term perspective. Both growth and value investors are equally passionate about advocating the superiority of one investment style over the other.


Value investors primarily invest in stocks that sell at a discount to the market. These stocks often have lower P/E ratios and higher dividend yields. Growth investors invest in stocks growing faster than the overall stock market and have higher earnings growth stocks with little or no dividends.


Growth stocks tend to outperform when the economy is performing well. Surprisingly, growth stocks have outperformed value stocks during the latter (mature) phase of a business cycle or just ahead of an economic recession, at least from a relative perspective. Into a recession or an economic contraction, especially during a severe or prolonged recession, both growth and value stocks decline on an absolute basis.


Since 1/10/23, over the past one (1) year, value has dramatically outperformed growth as evidenced by S&P Growth (IVW -25.58%) versus S&P Value (IVE -2.64%). Over the past three (3) years, growth and value have been even (IVW 7.24% versus IVE 7.45%). However, on an intermediate-to-longer-term basis, growth has outperformed value. Over the past five (5) years (IVW 9.66% versus IVE 7.72%) and the past ten (10) years (IVW 13.26% versus IVE 10.71%).


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.


The question is it time for investors to favor value or growth stocks?


Investors should understand the differences between the two investment styles, specifically sector allocations and stock positions. Why? Both of the investments - the S&P Large-Cap 500 Growth Index (SGX) and the S&P 500 Value Index (SVX) are market capitalization-weighted indexes. And as such, the largest S&P sectors and market-cap S&P 500 stocks influence the directional trends of the two investment-style ETFs.


As of 1/12/23, the sector composition of the S&P 500 Growth ETF (IVW) is as follows: Info Tech (41.44%), Consumer Discretionary (14.49), Healthcare (12.83), Communications Services (9.76), Financials (9.72), Industrials (4.08), Real Estate (2.33), Consumer Staples (2.18), Materials (1.42), Energy (1.42), and Utilities (0.06). The top 10 components of IVW by market capitalization account for 55.39% of total assets. They are AAPL (14.25%), MSFT (11.85), AMZN (6.84), TSLA (4.82), FB (4.28), GOOGL (3.91), GOOG (3.52), META (2.11), NVDA (2.07), and NFLX (1.74).


As of 1/12/23, the sector composition of the S&P 500 Value ETF (IVE) is as follows: Healthcare (17.40%), Financials (17.32), Industrials (13.01), Consumer Staples (11.95), Energy (8.35), Info Tech (8.01), Consumer Discretionary (6.30), Utilities (6.02), Communication Services (5.39), Materials (3.26), and Real Estate (3.15). The top 10 market-cap stocks in IVE account for 20.68% of the overall assets. They are BRKB (3.10%), JNJ (2.76), JPM (2.65), XOM (2.34), PG (1.94), UNH (1.76), BAC (1.67), CVX (1.66), KO (1.40), and MRK (1.40).


A brief review of the two ETFs shows wide discrepancies between the two investment styles regarding sector concentrations of S&P 500 sectors within Technology, Financial, Industrials, Communication Services, Consumer Staples, and Healthcare. As expected, the top ten market-cap weight stocks in IVW are all technology-related names. In contrast, the top ten market-cap stocks in IVE consist of an even split between Healthcare, Financials, Energy, and Consumer Staples.


It would then imply large-cap growth style investing via IVW is an investment in large-cap Technology stock. While IVE investing is a balanced bet on four specific sectors, including Healthcare, Financials, Energy, and Consumer Staples.


The enclosed monthly chart shows the relative strength performance cycles between S&P 500 Growth (SGX) and S&P 500 Value (SVX). SGX dramatically outperformed SVX from 2017 to 2021, creating an extremely overbought condition. A bearish island reversal in Nov 2021 first warned of leadership change from SGX to SVX. A sharp decline over the past year has resulted in SGX/SVX relative strength trend violating the critical 2016/2017 uptrend (currently at 1.73) and the pivotal 2018/2019 breakout (1.603-1.688). Also, the 10-mo ma (1.77) crossed below the 30-mo ma (1.96), solidifying a monthly death cross and reaffirming the relative outperformance cycle in value over growth-style investing.


The pertinent question becomes - are we headed toward a long-term sideways trading range environment like 2010-2016, where growth and value stocks traded leadership roles with neither party in control?


Or will this turn into a 1-year dramatic outperformance cycle of value over growth such as during 2000-2001?


Or will the multi-year period from 2003-2007 repeat where value outperformed growth?


A golden cross-buy signal in late-Dec 2022 and the ability of S&P 500 Value (IVE) to rebound from the 50-day and 200-day ma has triggered a sharp rally. A convincing move above 149.65-151.75 suggests 10.31/23.04 points or an IVE target at 162, near-term, and 172.5-173, intermediate-term. Also, a breakout above 157.04-157.19 (Jan/Apr 2022 all-time highs) suggests 30.58 points, rendering an IVE target at 187.62-187.77 over the long term.


Initial support rises to 149.5-151.75 (Jan 2023 short-term breakout) and below this 145-146.5 (Sept 2022 high and the 50-day ma) and 141.5-143 (Dec 2022 low and 200-day ma).


S&P 500 growth (IVW) has struggled over the past year, severely underperforming S&P 500 Value (IVE). The decline toward 55.16 (Oct 2022) rebounded from pivotal support at 53.5-55, coinciding with the Sept/Oct 2020 lows, the bottom of the Jun/Oct 2022 downtrend, and the 61.8% retracement from the Mar 2020- Dec 2021 rally). Additional support is visible at 51.5-52 (Jul 2020 V-pattern breakout).


Initial resistance is 60 (50-day ma) and above this formidable resistance at 63.5-64 or the Dec 2021 downtrend (64), the Dec 2022 highs (64), and the 200-day ma (63.5). A breakout signals a near-to-medium term recovery toward 66-67 (Apr 2022 breakdown, 38.2% retracement from Dec 2021-Oct 2022 decline, and Nov/Dec 2022 highs. Intermediate-term resistance remains at 71.5-73 or the Sept 2021 lows, Aug 2022 reaction high, and the 61.8% retracement. A higher high pattern above 71.5-73 signals a sustainable intermediate-term recovery.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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