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The S&P 500 is up 4.8% in the 2nd quarter to date but that is far from the whole story. The bull market over the last year has become ever narrower with the index return pulling away from the average return. This quarter the average return of the stocks in the index is actually negative, down 2.4%. Over the last year the index is up 26.3% while the average is just 15.9%. If you look at longer time frames you get a different picture. Over the last 3, 5, and 10 years, the gap between the average and the index is considerably narrower. And over the 5 and 10-year time frames the average is actually higher than the index. What’s going on?

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All that’s happening is that growth stocks are catching up from their underperformance during the bear market of 2022. Over the last 3 years, the S&P 500 value index and the S&P 500 growth index have almost the same return. I know that seems hard to believe but the numbers don’t lie. If you’ve been in a value fund the entire time and you’re now upset that you aren’t keeping up this year, you need to zoom out a little. 

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The real question is what happens from here. Will growth resume its outperformance of the last 10 years? Or are we in the midst of a trend change that favors value? History says that the long term return of growth and value are about the same (slightly favoring value depending on the time frame). The only problem is that there is no reliable way to predict which will outperform at any given time. There are some historical tendencies but they aren’t strong and not consistent. For instance, LC value has a higher average return when the dollar is strong but that hasn’t been true for the last 10 years. Why? Because LC growth outperforms strongly when rates are falling which was the case until the last couple of years. If rates are now going to be in a secular uptrend – and that’s where we think we’re headed after a cyclical decline – value will likely take the lead. The dollar will also play a role because the best environment for value is strong dollar/rising rates. At this point, both rates and the dollar are in holding patterns, mostly unchanged over the last 18 months. How will the long term trends emerge?

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