The Value Trade: Finished Already?
Six months ago on Means to a Trend, we took a look at the Growth vs. Value ratio and discussed a potential end to Growth’s decade of dynastic dominance. Value had shown signs of relative strength in the preceding months, and it was all taking place near a key extension from the dotcom collapse.
Value’s run continued in early 2021, with the SVX Index outperforming SGX by more than 10% by early March. In December, we noted that a long-term reversal in the ratio would require the Financials sector to lead, which most likely meant they need to be above their 2007 highs. The Financials did not disappoint.
Absolute performance hasn’t mattered of late, though. The ratio of Financials vs. the S&P 500 failed at resistance and is stumbling.
Last week, value stocks lagged growth by 2%. So was it just a tough week? Or did Value’s long-awaited day in the sun come to a premature end? Here are a few other things to consider.
The SGV/SVX ratio mentioned at the onset of this post is still below resistance from earlier this year. On the other hand, momentum improved, and Growth set a higher low relative to Value on the most recent pullback.
Industrials, a sector that’s been important to value’s outperformance, hasn’t surpassed relative resistance from its early-2020 breakdown. Similarly to the relative strength of Financials, above, momentum failed to confirm the most recent swing high, and prices took a hit last week.
Interest rates just fell to multi-month lows, too. Lower borrowing spreads tend to be bad news for Financial stocks, while lower rates disproportionately benefit valuations for faster growing businesses. Both are headwinds for the relative value trade.
From a longer-term perspective, those same yields are still holding decade-long support. It could be that we just needed further consolidation before rates (and the value trade) resume their march higher.
It remains to be seen whether last fall really was the bottom for Value, or just a bottom before the long-term trend resumes. If it was the bottom, last week’s pain will be forgotten soon enough.
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