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Last week I tweeted a chart of a ratio I have been watching for quite a while now. That ratio tracks the performance of the iShares S&P 500 Value ETF relative to the iShares S&P 500 Growth ETF. And it looked to me at the time that the former was breaking out relative to the latter after a very long and painful period of underperformance that extends far longer than the time frame in the chart below.
Is that a breakout I spy in the value-to-growth ratio? pic.twitter.com/xuTbbc9Oor
— Jesse Felder (@jessefelder) September 5, 2019
It’s gone on for so long, in fact, that value is now cheaper than it has ever been relative to growth – even more so than in March of 2000 at the peak of the dotcom mania, which is saying something.
Perhaps the recent reversal in #value v #growth stocks has something to do with the fact that value is now really, really cheap! pic.twitter.com/o6BJDA5aqq
— jeroen blokland (@jsblokland) September 10, 2019
One indicator that would suggest that this reversal in favor of value over growth may be sustainable and more than just another blip is the direction of the yield curve. As noted recently by John Authers, value seems to benefit from a steepening yield curve. And, because the Fed recently began lowering short-term interest rates and appears to be set to continue with further cuts this year, it seems the yield curve should likely steepen in coming months.
'A flattening yield curve aids Momentum and Profitability (or Quality) while steepening aids small companies, and Value.' https://t.co/Nw8mu1YlLy by @johnauthers pic.twitter.com/TyXE76sJQR
— Jesse Felder (@jessefelder) September 11, 2019
However, another important inference can be drawn from the shift away from growth and momentum into value (and a steepening yield curve): this sort of widespread risk aversion is usually characteristic of a bear market for equities (as is a steepening yield curve driven by steady rate cuts).
Growth vs. value, 2-day rate of change. $IVW $IVE $SPX pic.twitter.com/tPE7sHvJ8N
— Mark Ungewitter (@mark_ungewitter) September 11, 2019
As Peter Boockvar points out, the damage done to momentum favorites over the past few days comes as one of the largest and most heavily promoted IPOs of the year is facing increasing skepticism that is significantly weakening demand for its shares. All of this points to a broader shift towards risk aversion and is reminiscent of the massive shift out of high-flying tech stocks in 2000 and into securities that offered some sort of a “margin of safety.”
I might be stating the obvious to many but it should be no coincidence that at the same time we're seeing a massive downshift in the valuation of WeWork, investors are now questioning the valuations of the mo mo stocks. Valuations don't matter until they do.
— Peter Boockvar (@pboockvar) September 10, 2019
For these reasons, I believe value investing’s long slog may finally be over but so may the long bull market.