Investors and academics have engaged in the Growth versus Value debate for decades. Proponents of Value point to the great success of investors like Benjamin Graham, Sir John Templeton, and Warren Buffet. Plenty of academic research concludes that Value beats Growth over long investment horizons. However, modern-day practitioners know the stock market cycles between growth and value, and these cycles can last for many years.

The stock market has been in a Growth cycle since the Great Financial Crisis. This is a longer-than-normal cycle, and it is no surprise that investors are beginning to wonder if it is time for Value to outperform. We decided to look at past Growth and Value cycles by analyzing the total returns (i.e., dividends and price appreciation) of a broad market index. The Russell 3000 contains the 3,000 largest stocks by market capitalization, which is about 97% of the U.S. equity market. FTSE Russell conveniently separates the Index into a Russell 3000 Value Index and a Russell 3000 Growth Index. Basically, the Russell 3000 is a combination of the Russell 3000 Value and Russell 3000 Growth indexes.

FTSE Russell uses three metrics to separate growth stocks from value stocks: P/B (price-to-book), 2-year I/B/E/S earnings growth forecasts, and 5-year historical sales growth. The Russell 3000 Value Index contains the Russell 3000 companies with relatively lower metrics, and the Russell 3000 Growth Index contains the companies with relatively higher metrics. Since the Russell 3000 Value and Russell 3000 Growth make up the Russell 3000, we would expect the Russell 3000 to always be the second-place performer, regardless of which style was leading.

We choose to conduct our analysis over a 40-year period to capture a full stock market cycle (ie., a complete secular bull market and a complete secular bear market). The inception date of the Russell 3000 Index is January 1, 1984, which is not quite 40 years. However, since FTSE Russell provides backtested returns for the 4-year period prior to inception, we grabbed some of those returns and conducted our analysis over the most recent 40-year period from 11/30/1981 through 11/30/2021.

As shown in the graph below, Value outperformed for most of the 1980s. For the 94-month period from 11/30/81 through 9/30/89, the total return for the Russell 3000 Value Index was 305.06%, resulting in an annualized total return of 19.78%. The total return for the Russell 3000 Growth Index was 205.72%, resulting in an annualized total return of 15.51%.

Russell 3000 – Cumulative Total Returns, 11/30/1981 through 9/30/1989

For the first 15 months of this period, Growth and Value were neck-and-neck. Value stocks began to outperform once the U.S. economy gained traction and investors realized the next secular bull market had begun. Value maintained its lead for more than 6 years before handing the baton to Growth.

Growth began to overtake Value once the U.S. found itself in the throes of a financial crisis featuring savings and loan associations (S&Ls), commercial real estate, and junk bonds. For the 126-month period from 9/30/89 through 3/31/00, the total return for the Russell 3000 Growth Index was 565.36%, resulting in an annualized total return of 19.61%. The total return for the Russell 3000 Value Index was 311.57%, resulting in an annualized total return of 14.30%.

Russell 3000 – Cumulative Total Returns, 9/30/1989 through 3/31/2000

Starting in late-1992, we saw a short burst of Value outperformance as value stocks moved to catch up to their growth brethren. With the S&L crisis under control, the Russell 3000 Growth and Value indexes moved in synch for a year. By mid-1994, Growth took the lead as consumer use of personal computers, wireless communication, and the World Wide Web began to grow exponentially spawning a new Tech revolution. As investors latched onto the dot.com craze, they dumped their value stocks for the new Tech darlings. Their irrational exuberance drove the Russell 3000 Growth to unsustainable valuation levels.

The spectacular burst of the Tech Bubble marked the end of an 18-year stock bull market. Investors faced the arduous grind of a secular bear market. Seasoned investors quickly dumped their growth stocks and piled back into value stocks. Newbies kept buying the dip (and kept losing money). For the 86-month period from 3/31/00 through 5/31/07, the total return for the Russell 3000 Value Index was 89.42%, resulting in an annualized total return of 9.32%. The total return for the Russell 3000 Growth Index was -25.98%, resulting in an annualized total return of -4.11%.

Russell 3000 – Cumulative Total Returns, 3/31/2000 through 5/31/2007

Value stocks got off to a rough start in the new millennium. The 9/11 attack and the Enron and WorldCom scandals gave investors a few more reasons to find a place to hide. Fortunately, they could hide in their homes—and their second homes, and their vacation homes, and their rental properties. Real estate was the new investment craze, and mortgage credit expanded to include subprime borrowers. With housing in a bubble, Value significantly outpaced Growth as consumers pulled the equity out of their homes to spend, spend, spend. By 2007, home prices had risen to outrageous levels—then credit collapsed.

Growth began to overtake Value as credit spreads widened and the stock market felt its first jolt of the Great Financial Crisis. Since 5/31/07, the total return for the Russell 3000 Growth Index has been 493.34%, resulting in an annualized total return of 13.07%. The total return for the Russell 3000 Value Index has been 156.03%, resulting in an annualized total return of 6.70%.

Russell 3000 – Cumulative Total Returns, 5/31/2007 through 11/30/2021

Growth has outperformed Value for more than 14 years. Is it time for Value to take the lead? Perhaps the process has already started. Value stocks have made a strong comeback in the past 15 months. Growth stocks are putting up a good fight, and the two may duke it out for a while until one emerges victorious.

We are not assuming this cycle will end with a bang, like the last three. It may transition to Value over time as inflation eats away at the margins of many growth companies and their future growth expectations decline. Or there may be some catalyst that ignites the next Value cycle. Until we have more information, exposure to both is best.

We will next take a closer look at the Russell 3000 along the Growth-Value spectrum by observing the behavior of small-cap stocks (Russell 2000) and large-cap stocks (Russell 1000). We expect to find some interesting insights about Growth and Value. Stay tuned for Part 2.

DISCLOSURES

All expressions of opinion reflect the judgment of the author and are subject to change. Past performance may not be indicative of future results. There is no assurance that any of the trends discussed will continue, or that any of the forecasts will occur.

You should not construe any information in this publication as investment, financial, or any other professional advice. Nothing contained in this publication constitutes a recommendation, endorsement, or an offer to buy or sell any securities or other financial instruments. You should conduct your own research or speak to your investment advisor before investing.

SBC Investment Management prepares this material as a resource for its clients. This content is for informational purposes only and does not address the circumstances of any particular individual or entity. You may contact us to discuss the content of this publication within the context of your own financial situation.

Growth vs. Value: Is It Time for Value to Take the Lead? - Part 1

Growth vs. Value: Is It Time for Value to Take the Lead? - Part 2