The market has shifted over the past 9-months, which has caused many to come out and proclaim that the growth trade is dead and that value will prevail for the next several years, if not longer. Before we get to that, let’s take a look at some charts that plot the relationship between growth and value going back over the past 30-years or so. We are going to look at this over five phases.

Let’s start with the 1990’s when, for much of the decade, both growth and value were strong performers:

As you can see, both groups did exceptionally well with the charts looking nearly identical. The 10% gap in price performance is basically offset by the difference in dividend yields (value yields tend to be 2% to 3% higher than growth yields), so essentially, nothing was gained from one to the other. The narrative over this time was one of general peace throughout the world, a new age of technology and strong growth. Okay, let’s move to our second phase:

Here, we have narrowed up the timeframe to just under 3-years. From 1998 to part way through 2000, growth absolutely smoked value to the tune of about 75%! The kickoff to this massive growth outperformance was sandwiched by two major crisis – the Asian Crisis of the summer of 1997 and Russian ruble crisis of the summer of 1998. Thus, the narrative of relative calm changed.

The Fed and other global central banks poured unprecedented (for the time) stimulus into the system to head off the crises against a backdrop of a very strong U.S. economy, which lit a fire under growth stocks. Add to this the impending doom of Y2K and sharp ramp up in IT spending both because of this and because of the boom in internet related telecom spending and value managers were either seeing massive outflows or worse, while a new paradigm of growth was here to stay.

Okay, let’s now shift to phase 3:

The tech bubble burst and with it the growth over value trade with all of the relative gains of '98-'00 wiped out over the next seven or so years. The phase also kicked-off with the election of George W. Bush. It also was fairly closely aligned with the September 11^th attacks and a shift from a world largely at peace to a world at war with terrorism.

The shift to value lasted until October of 2007, which also coincides with where many would carbon date the beginnings of the global financial crisis. Lastly, the 2000 to 2007 period was marked by one of the longest Fed tightening campaigns of all-time, which was designed in part to offset large tax cuts and increased government spending. Okay, let’s shift to phase 4:

Let’s call this the calm before the storm. Again, growth outperforms, by 40% or so over 9-years, especially when we account for yield differentials is not an enormous difference. We should also take note that the beginning of the phase roughly matched another transfer of power, this time from Bush II to Obama. There was a lot of stimulus in the system to be sure, but this was challenged by very low growth, so the environment was both unfavorable and favorable for all. Okay, let’s shift to now to our final phase:

The start once again coincides with a regime change in the U.S. and the election of Donald Trump, which led to a massive ramp up in stimulus (tax cuts) and deregulation. The Fed, as it had in 2000, was poised to step in and offset the fiscal stimulus through tighter policy, but then either the selloff in stocks that took place in the fourth quarter of 2018 or the constant haranguing from Trump or some combination of both spooked the Fed and they very quickly reversed course. By February of 2020, Growth had outpaced value by nearly 60% over 3-years (or about 50% more than it had in the prior 9-years).

And then COVID hit and with it truly unprecedented stimulus, which drove the outperformance of growth over value a further 50%+. This brings us to the present day, which is not really a phase yet (too soon), but the heart of the argument that is making the rounds today. Let’s first look at a chart and then comment:

So far, over the past 9-months or so, value has outperformed growth by about 21%. This coincided both with the election of Joe Biden and the successful development of vaccines for COVID-19. It also led to even more stimulus, but also the emergence of inflation and the ultimate threat of tightening policy to offset this spike in inflation.

Here are some points on this:

• While causality is always in question, the 2000, 2008, and 2016 cycles all coincided with changes from one party to the other in the U.S.;
• Not surprisingly, Fed policy often plays a role in shifts. 1997-2000 saw Fed stimulus in the face of a strong economy, while 2000-07 saw a prolonged tightening cycle. 2007 to 2016 saw unprecedented Fed stimulus and then 2016 to 2020 saw various wild swings in what the Fed was prepared to do;
• Global events are also a common theme: the Asian and Russian crises, the September 11^th attacks, the Global Financial Crisis, the election of Donald Trump, COVID-19;
• Head-fakes can happen, but they are usually pretty mild – while all of the phases saw periods in which the under-performer outperformed for a period of time, the reversals were generally pretty mild and did not tend to last all that long.

Final Thoughts: All of these pieces are in place to varying degrees today. This does not mean that a new phase has begun, but there is probably enough there to be making changes at the edges or, perhaps, even a bit deeper. The last bullet intrigues me (which is funny because I wrote it, so it is sort of a humble brag as well) as 9-months and 20%+ would be somewhat unprecedented if it were just a head-fake.