Growth Vs. Value: Preparing For The Big One

Time, Time Management, Stopwatch, Industry, Economy

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It’s coming. Is it here? Perhaps. Or maybe not. But sooner or later, it is coming. Preparing now for the eventuality seems the most prudent course.

Investment markets share certain characteristics with earthquakes. Pressures mount as forces shift out of balance. Hopefully gradually, and sometimes most suddenly, these forces revert to a more balanced state and the process begins again.

Seismology and investing share similar objectives of trying to predict largely unpredictable breaking points, leading to the release of built-up imbalances. For earthquakes and investing, long periods of mounting pressure create the potential for catastrophic outcomes, as the sudden rebalancing of underlying forces mark the end of one cycle and the start of a new one.

The pressures or imbalances seem obvious, but trends persist nonetheless. Until they don’t. Investors, like homeowners considering earthquake insurance, are best served by preparing for these inevitabilities, even while recognizing the limited predictability.

Increasing Pressure On A Value Recovery

For the last few years, value-oriented investors have been waiting (and waiting) for the inevitable "big one" to arrive and finally compensate them for an agonizing wait. They’ve been watching their growth counterparts, the metaphorical builders of mansions on coastal fault lines, enjoy a surprising windfall.

While a value recovery seems likely by its repeated occurrence throughout market history, it feels to many like we are waiting for something that might never come. The recent performance of growth stocks, on the other hand, might be described as its own tsunami; a relentless, seemingly unstoppable force arising from its own set of circumstances leading to its own big one.

At the time of this writing, growth stocks — as measured by the S&P 500® Growth Index — have gained nearly 35% over the past year on a total return basis. Value stocks, in contrast, have pretty much gone nowhere, with a meager gain of 3.3%.

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End claims sourced from SP&P 500® Index, as of Dec. 10, 2020 and MSCI ACWI ex-U.S. Index, as of Dec. 10, 2020.

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