The financial media has recently begun to focus on the ongoing rotation from U.S. growth stocks to U.S. value stocks. Specifically, a rotation out of high valuation, momentum growth companies. It’s interesting to note this rotation actually began to occur quietly in September – something we’ve been anticipating for a number of months now.
In our view, this comes as no surprise for a couple of reasons. First, as you can see in the chart below, the Russell 1000® Growth Index (green line) has dramatically outperformed the Russell 1000® Value Index (blue line) since 2011. In the bottom half of the chart (black line), you can see the P/E of the Russell 1000® Growth divided by the Russell 1000® Value. The valuation premium of growth over value has reached historic levels – levels not seen since the peak of the tech bubble in early 2000. Investors had been paying more than a 70% premium for U.S. growth over U.S. value. When valuation differentials become this extreme, it is generally only a matter of time before you see some “reversion to the mean”.
But more importantly, value stocks – particularly those that are most economically sensitive – are poised to be the largest beneficiaries of a normalizing economic environment post-COVID. When investors panicked out of stocks in the spring, economically sensitive companies (gaming, hospitality, travel, consumer discretionary) were hardest hit, creating enormous opportunities and excellent risk/reward profiles. We stated at the time that some of the purchases we were making in March and April of this year were better opportunities than many of the positions we purchased in the depths of the Financial Crisis in early 2009. We still believe that today.
Assuming progress on the vaccine front continues at its current torrid pace, we expect substantial continued outperformance by value over growth (particularly momentum growth) as the market discounts a much more robust economic recovery in 2021.
These shifts in market leadership all serve to emphasize the importance of having a style-agnostic approach. For over 80 years, Osborne Partners has utilized the same style-agnostic discipline of searching out superior risk/reward profiles, regardless of growth or value. This discipline has served our clients well through many different market environments and will continue to in the future.