The Recent Success of Growth Stocks

Growth_Value

There’s been a recent divergence in the US stock market. Growth stocks (which are faster-growing companies that tend to have high stock prices relative to the fundamentals of their businesses) have done better than value stocks (which are slower-growing companies that tend to have low stock prices relative to the fundamentals of their businesses) by a sizable amount.

While faster-growing companies certainly sound like they’d be good investments, over the long term it’s actually value stocks that have done better. Yet it’s not unusual for growth and value to have cycles where one substantially outperforms the other for a few years at a time. During the late 1990’s growth stocks surged ahead of value stocks, for example. For much of the 2000’s the opposite was true.

In recent years growth stocks and value stocks had moved almost in lockstep until late 2014, when growth began to outperform. The gap widened in the past few weeks when a number of prominent growth stocks, such as Alphabet (formerly known as Google) and Amazon, reported better than expected third-quarter earnings.

Based on the history of growth/value cycles, it’s very possible that this could be the start of a trend that lasts a few more years. But that doesn’t mean that abandoning value stocks and investing only in growth stocks is a good idea. When the growth/value cycle turns, it can turn extremely quickly. After their success in the late 1990’s, growth stocks came crashing down in the early 2000’s even as value stocks barely budged. After surging in the mid-2000’s, value stocks fell much faster than growth stocks during the financial crisis in 2008.

As is often the case with investing, diversification is probably a better strategy than either only growth or only value. There’s nothing wrong with investing more in growth stocks to try to benefit from periods when they do better, or investing more in value stocks to try to take advantage of their long-term outperformance. But history suggests that having only one or the other can leave your portfolio exposed to extended periods of pain.

Topics: Value Growth