FINANCIAL MARKET UPDATE 1.12.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

GROWTH TROUNCED VALUE IN 2020

For the fourth consecutive year, growth stocks have outperformed their value counterparts. The degree of outperformance in 2020, however, was on a different level. Small and mid-cap value stocks trailed by the largest amount since the technology bubble of the late 1990s, while large-cap value stocks trailed by the largest amount ever. Factors including low interest rates and the strong relative performance of the so-called work-from-home (WFH) stocks likely contributed to growth’s dominance.  

Now that we have entered 2021, what is the outlook for growth versus value stocks moving forward? There are a number of reasons to believe the performance of value stocks may be poised to rebound. The biggest support for this happening is the relative valuation between growth and value, as the two charts below illustrate.

Investors typically pay a premium relative to the market for companies that demonstrate rapid growth. The size of the premium that investors pay ebbs and flows with market conditions but tends to return to its long-term average level. Today, investors are paying the highest premium for growth in nearly twenty years!

 

Source: Morningstar Direct. Valuations are based on an equally weighted composite of price/book value, price/earnings, price/sales, and price/cash flow of each value index relative to the broad market. Large cap growth is represented by the S&P 500 growth Index. The broad market was represented by the Russell 3000 index. Data from 1/2001 to 12/2020.

Value stocks, on the other hand, typically trade at a discount relative to the broad market. As these companies fell further out of favor with investors over much of 2020, the discount continued to widen. By the end of the year, investors had the ability to purchase smaller, value-oriented companies at the largest relative discount in decades. For investors concerned about owning stocks while the market appears to be so expensive, small-cap and value-oriented companies offer an attractive opportunity.

Source: Morningstar Direct. Valuations are based on an equally weighted composite of price/book value, price/earnings, price/sales, and price/cash flow of each value index relative to the broad market. Small cap value is represented by the S&P 600 Value Index. The broad market was represented by the Russell 3000 index. Data from 1/2001 to 12/2020.

The last time the dispersion in performance and valuation, between growth and value, was this wide (1999), value stocks went on to outperform dramatically for several years. Of course, that does not mean the same will happen this time. It is possible that growth stocks will continue their dominance. Recently, small and value tilted companies have staged a small comeback, though we have seen multiple false starts over the past several years. Still, valuations have a tendency to revert to their long-term averages. Growth stocks are trading well above average, while value stocks are trading well below. A reversion would suggest strong relative performance for value.

WEEK IN REVIEW

  • Data published by the Bureau of Labor Statistics (BLS) last week showed the US economy shed 140,000 jobs, compared to forecasts of a 50,000 job gain. Job losses were concentrated in the virus-sensitive hospitality industry, including bars and restaurants, as accelerating Covid cases caused governments to intensify restrictions. The unemployment rate held steady at 6.7%.
  • This week kicks off the earnings season for Q4 2020, with many of the big Wall Street banks reporting. According to Factset, YoY earnings are expected to be -8.8%, which represents an improvement from the original estimate of -12.7%, made at the beginning of the quarter. Typically the pattern is for companies to guide earnings expectations lower throughout the quarter, which lowers the bar making them easier to beat. This is the second consecutive quarter where estimates have increased during the quarter. With valuations stretched, strong results are needed to justify more gains. One positive is that YoY growth rates are going to get a tailwind as the weak Q1 2020 quarter becomes the comparison for Q1 2021.
  • On Wednesday, look for an update on inflation. Jobless claims will be published on Thursday. Finally, retail sales and industrial production will be published on Friday.

HOT READS

Markets

  • Economy Sees Job Loss in December For The First Time in Eight Months as Surging Virus Takes Toll (CNBC)
  • Two Worlds: So Much Prosperity, So Much Skepticism (Morgan Housel)
  • Cash in Circulation is Soaring, and that Usually Means Good Things for the Economy (CNBC)

Investing

  • Unrelated Stock Sees Massive Gains Days After Elon Musk Said People Should ‘use Signal’ (CNBC)
  • The Stock Market is Causing the Bubbles (Michael Batnick)

Other

  • Former US Air Force Fighter Pilot Breaks Down 12 Fighter Pilot Scenes From Film & TV (Wired)
  • ‘The Browns Is The Browns’ (Sports Illustrated)
  • We are What we Remember (Farnam Street)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY