Short answer: no, not yet.
There’s been barrels of digital ink spilled on the topic of whether the relationship between growth and value stocks has shifted.
Ahead of the snap in relative performance, there was a risk that there would be a shift favouring value stocks due to the daily ratio chart and the stretched relative performance the ratio was experiencing.
But by no means did anyone expect the move to be that quick and severe.
While the move was large, did it truly end the reign of growth stocks? Let’s look at the chart.
StockCharts.com, as at 20 September 2019
A fight for leadership
Above is a weekly relative performance chart of the two popular Invesco S&P 500 Pure Growth [RPG] and Pure Value [RPV] ETFs. When the line is rising, that means RPG – which is representative of growth – is outperforming RPV – which represents value.
For the last several years, the ratio has been in a wide range, with a ceiling of around 1.8 (this can be seen on the red horizontal line in the chart above). When growth stocks led value up to this point, there was a shift in leadership favouring value.
That was until there was a breakout in the ratio earlier this year when growth stocks took things up a gear and set a new multi-year high in the ratio between RPG and RPV.
When another period of rotation happened, it caught a lot of traders by surprise by just how deep the move occurred.
“When another period of rotation happened, it caught a lot of traders by surprise by just how deep the move occurred”
In fact, there’s only ever been two previous one-week shifts in relative performance that have favoured value since 2010 (this can be seen in the bottom panel of the chart).
What’s noteworthy of the previous two major dips was that they occurred near the start of new intermediate-term trends favouring value, which happened in September 2011 and February 2016.
But they also occurred when the broader market was experiencing double-digit corrections, with the last pain point being the bottom falling out for growth stocks and the resulting move higher in the market, which ultimately favoured value stocks for a period of time.
This time around there hasn’t been a broad market decline, instead, there’s just a few whispers of an all-time high, so it’s not completely clear if a fair market comparison between 2011 and 2016 can be made just yet.
“It’s not completely clear if a fair market comparison between 2011 and 2016 can be made just yet”
Growth stocks set to continue uptrend
Looking at the data on right side of the chart, which highlights the latest price action for the ratio of RPG and RPV, the move lower took the ratio right to 1.8 intra-week and stopped.
Not too long after growth took back control and moved the ratio higher. This all took place with momentum (this can be seen in the top panel of the chart) remaining in its bullish range.
While the daily chart of the ratio shows a bearish divergence in momentum, the weekly chart does now.
Instead, the relative strength index hasn’t been seen to reach the prior lows set in 2017 and 2018. Therefore, I think it’s still too premature to put a fork in growth’s leadership and call it done.
“I think it’s still too premature to put a fork in growth’s leadership and call it done”
The trend remains above the breakout point and momentum is holding on to its bullish range. Neither of these two points are bearish for growth’s up trend in relative performance.
However, if the markets were to experience another round of bearish pressure for the ratio and there is a solid close under 1.8 on the weekly chart with momentum to hold above either the 2017 or 2018 lows then there may, in fact, be a larger-term shift in leadership. As always, I wait for price confirmation.
By Andrew Thrasher, who serves as the portfolio manager for the Financial Enhancement Group, a wealth management firm in Indianapolis, Indiana, and is also the founder of Thrasher Analytics, an institution research firm.