Growth vs. Value Stocks

Growth vs. Value Investing: The Difference Has Never Been So Extreme

July 1, 2019
Mike MorelandBy Mike Moreland
Vice President Investments

One of the perpetual dichotomies in investing is the relative behavior of growth versus value investing. When times are good, growth themes (technology, etc.) generally lead the way. In more challenging periods, value (stable demand and other sectors more immune to the business cycle) tends to prevail.

One of the components of this pattern is that it often moves to extremes. As the chart below shows, the difference between growth and value themes today is as great as any time in the 90 years — even exceeding the dot-com bubble of the late 1990s.

And this chart tries to “level the playing field” over time by measuring the standard deviation of the differences, not just price behavior or relative earnings growth or price/earnings ratios. It shows today’s difference is approaching three standard deviations from the norm. What does this mean? The imbalance between growth and value is approaching the 99th percentile — again, unprecedented in market history.

At the same time, one of the truisms of investing is “valuation is not a timing device.” Just because an asset class is expensive (or cheap) on an absolute basis or relative to other options does not mean a reversal is around the corner. Trying to pick the peak or trough is a fool’s game.

Two approaches to investing: Which is better?

That’s why our style is to remain broadly diversified, but to “lean with the wind” to participate in whatever style is in favor.  

We are naturally value-oriented, and take this path to better protect client assets in less opportune times. We don’t ignore the benefits of growth when appropriate, but we always ask ourselves, “What if we’re wrong?”  The risks inherent in a value orientation tend to be lower when times are tough — even if we sacrifice some incremental returns when enthusiasm for growth themes reigns.

For a deeper dive into your portfolio and how it serves your goals, contact your advisor. And have a happy 4th of July!

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About the Author

Michael Moreland

Mike Moreland is an advisor to the Wealth Management division, and former Vice President of Investment Services at Security National Bank. With more than 45 years of Wealth Management experience, along with his Sioux City roots, Mike has a rich background in finance and Siouxland.