Near the end of last year, value stocks — companies that are considered cheap and are trading for less than they are worth — started ramping up and outperformed the mega-sized technology-oriented growth stocks that had dominated the U.S. stock market for years.
However, in July 2021, growth stocks – companies exhibit earnings growth above that of the broader market — once again overtook value stocks. This led many investors to question if value stocks would once again be left in the proverbial dust.
In many cases, the gains that growth stocks have made so far in the second half of this year are just a normal blip on the radar of the typical long-term market cycle and shouldn’t cause concern. The drivers of value’s outperformance at the end of 2020 (a rebound in global earnings, promising COVID-19 vaccine developments, and extended fiscal support by central banks) are still in place and should be for the foreseeable future.
History proves this. During the tech bubble of the late 1990s, growth stocks crushed their value counterparts. But, when that bubble burst in 2000, value bested growth for about six years (despite a handful of reversals in that period), even though investors had reason to doubt value several times during that time. Three months after the first phase of value’s strong outperformance, growth made a temporary comeback.
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After that, there were several short-term snapbacks where value lagged growth. In three of those instances, growth gained about 10% relative to value before the value trend resumed. Investors who had sold their value positions at the bottom of a short-term reversal lost out—in some cases, by nearly half of the outperformance recorded over the entire period.
There are many differences between today’s market and the one from two decades ago. But comparing them can illustrate how a strong rotation to value from growth might play out now. Most importantly, the comparison acts as a reminder of the cyclical nature of the market…and provides reassurance that growth stocks cannot outperform value stocks forever.
When markets have setbacks, it’s essential (but admittedly tough!) to remain calm and stick to your plan. The most effective investing approaches involve building diversified portfolios that attempt to earn consistent returns over a specific time horizon and that align with your personal risk tolerance.
It’s almost impossible to escape the news. However, remember that daily, weekly, monthly, and even quarterly market movements are usually just blips on a long-term investor’s radar.
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