Growth vs Value, Which Wins in 2nd Half 2023?

June 19, 2023No Comments

Growth vs Value. Today, I’d like to take a look at value stocks as a potential play for the second half of 2023.

For those of you who subscribe to the ValueTrend Update newsletter (it’s free – subscribe here to ensure you get the blogs AND newsletters sent to you via email), you will have received our most recent edition on Friday. A couple of points were emphasized. First, we are seeing a potential early rotation back into value. This is illustrated by the fact that breadth is improving in the market after the recent AI madness.

Next, we discussed some of our rotations within our Equity and Aggressive managed accounts. Specifically, we noted that we are AVOIDING technology for the time being, with an eye on a probable and opportunistic pullback.  Truthfully, we own one tech position in the Aggressive Strategy, and none in the Equity Platform. I’m presenting two perspectives on growth vs value stocks today. One “pro” growth stance and one “avoid” stance. First the “avoid” argument.

Growth vs Value: Value Stocks Do Better in High Rate/High Inflation

I’ve posted this chart a couple of times in the past, and its worth revisiting at this juncture. Take a look at the 1970’s CPI pattern. Soaring inflation, from below 2% – to near 12% in 1975. So the Fed tightened, and CPI fell back to 6%. Above 2%, but moving in the right way (sound familiar?). Hurray, said the market! Its under control!

The Fed backed off. BOOM! By 1980 inflation had more than doubled from the 6% to 13%! This is why the market may, perhaps, be premature in its low inflation hopes, and the push into rate sensitive growth stocks. The Fed may not want to repeat the mistake of letting go of the reins so early this time.

Inflation soared in the late 1970s graph | Growth vs Value

I’ll share a quote from Larry McDonald on the tech sector, and inflation expectations. Remember, this guy has been around the block a few times. So its worth listening to his thoughts:

“Disinflation is transitory. A reminder. It´s like losing 30 pounds. The first twenty come off like a knife through butter, the last ten… less so. The Nasdaq is priced for a 1-2% inflation world, NOT for sticky inflation. We are in the eye of the inflation storm. There is a large body of well-known evidence which points to a plunge in the inflation data. Since Q4, a five-year-old can see that. The mad mob is very busy extrapolating every ounce of good news endlessly forward. What’s far less celebrated? Core inflation is not benign in June 2023: it’s plateauing near 5%. That´s a rate 2.5x the Fed’s target.   

Now one thing is clear. Value over growth – is the trade for 2H 2023. As the rude awakening takes hold, they will – once again – start running for the hills.  We are back near $18T in the Nasdaq 100 up from less than $13T in December. Permanent disinflation is the most crowded, one-way thinking on the planet.”

History shows us, value beats growth during inflationary times. The current elevation of tech valuations is a function of the belief that inflation is dead and that at least certain types of growth (AI) are ascendant. However, inflation is not dead. We think inflation numbers might be benign for the next couple of months, but we are highly confident that there will be another inflation wave. So, we have less inflation now and we will have more inflation later. That is good for value stocks, all things considered.

Growth vs Value: Growth Is Looking Good From a Technical Perspective

To counter the above arguments against growth stocks, I’d like to look at the value vs growth via the Morningstar ETFs. The black line on the chart below is the growth stock ETF, vs the red line being the value ETF. Note that the growth ETF mimics the SPX and NAZ, which makes sense given the overweighing of those categories in these indices.

Note that since 2021, the correlation line (pane below price) wavers up and down – meaning that the two sometimes move in opposite directions, and sometimes they move together. This tells us that there can be a changing of the guard (growth is hot now, value could then become hot without much notice).

The bottom pane is the relative performance (growth:value).

  • Note that growth outperformed strongly in 2021. Value did much better in 2022 (the price chart also shows this via a flat return for value vs decline for growth).
  • Growth outperformed for the first half of 2023.
  • Value is very recently moving with growth, but it needs to break its lid before we get too excited.
  • You can tell by the angle of ascent on the growth line that its gone parabolic – hence my call for a pullback.
  • That said, growth looks better from a technical perspective (after a pullback to take out the excess).  That’s why I am calling any such pullback “opportunistic”.

iShares Morningstar Large Cap Growth ETF 16-Jun-2023 | Growth vs Value

Keith on Bloomberg BNN next Monday

I’m on MarketCall next Monday June 26th at 12:00 noon.

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Keith at Moneyshow Saturday September 9

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Saturday, September 9, 2023, at 3:00 pm – 3:45 pm EST
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As investors navigate this landscape, considering both sides of the argument becomes crucial for making well-informed decisions. Stay tuned for further market developments, and explore the opportunities that arise amidst the ongoing Growth vs Value dilemma.


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