Is the Growth vs Value Narrative Coming Back?
*Warning: This is not an article comparing between value investing and growth investing. Rather, it is a challenge to the readers to apply value investing principles when it comes to picking value stocks vs growth stocks.
Background
As you are already now aware, the US stock markets have been selling off for the past 4 consecutive weeks, since mid-Feb inclusive of this week. The $E-mini S&P 500 Futures(JUN5) (ESmain.US)$ and $E-mini NASDAQ 100 Futures(JUN5) (NQmain.US)$ have both fallen by 9.2% and 12.5% respectively. As the general understanding of a technical recession means to have an index drop by more than 10%, the NASDAQ effectively is indeed in a technical *correction* with the S&P trailing close behind.Though not as bad as the US markets, global stock indices also took a beating. Japan and some emerging Asian markets such as Malaysia, Singapore and Taiwan also sustained some drawdowns.
What Does Economic Data Say?
While President Trump's tariff-led war against trade partners contributed quite a bit to the volatility and uncertainty in the markets, the recent non-farm payroll (NFP), unemployment data and US CPI data did nothing but contribute to more uncertainty in the markets.
US Labour Market
US markets were mixed following the recent labour data release on 7th March. Despite falling short of expectations, NFP numbers actually grew from a month-on-month change.
Yet, at the same time economists also saw an uptick in the unemployment rate, up to 4.1% from 4.0%. Given the mixed data along with sticky inflation, the future growth of the US economic engine seems cloudy at best.
Consumer Price Index (CPI)
Overnight, 12th March, the February CPI data was released. While both the core and headline CPI both edged higher, they still came in below market's consensus.
The CPI data showed that while inflation was generally sticky, the fact that inflation numbers were slowing was unanimously welcomed by both the US Fed and investors alike. The odds of the US Fed looking to resume their rate cuts increased slightly as treasury yields fell across the board along with equity markets also taking a pause and rebounding.
What Next For The Economy?
This brings me to my next question. With mixed labour data along with slowing inflation will consumers still continue investing and spending the way they do? Not to mention that all these data are lagging data against the backdrop of an ongoing tariff war between the US and her trading partners. If the labour market continues to soften while the tariff war is ongoing, it would then make sense that consumers will have to tighten their purse strings and do their best to spend less. This would then become a slowing inflation scenario that is driven by weak demand + increasing tariffs, rather than being due to an increase in productivity and efficiency in reducing costs.
Follow the chain of thought below:
In short, this is essentially how slowing inflation (disinflation) led by weaker demand eventually leads to stagflation. Businesses lower their prices in order to attract customers. However, due to customers spending less, businesses make less revenues and aren't able to keep their workers. Workers are then retrenched or quit on their own accord and the cycle repeats until the economy is in a deep recession.
Due to Lack of Growth The Economy Will Enter A Recession.
At this point, I would like to suggest a narrative that has gone out of style over the years. The Growth vs Value story.
Growth stocks: Stocks that growth exponentially faster than the broader market. These companies tend to reinvest their cashflow back into the business and provide accelerating capital returns for their investors.
Value stocks: Stocks that are undervalued compared to their peers but yet have long term potential to generate meaningful returns for investors as they generally have solid and sound fundamentals.
Post GFC 2008, growth stocks started to gain traction as the stock markets recovered. The close to 0% interest rate environment coupled with low inflation helped boost growth stocks as they had cheaper access to capital and funding. Further, investors were rotating out of value plays which generally belonged to more defensive sectors like healthcare, telecommunications and consumer staples.
Over the next decade or so, growth stocks continued to be in favour with value plays dropping off the radar. It was only when interest rates were sky high following the Covid19 pandemic that investors considered taking a look a value investing. This, however, was short lived as the age of SPAC-listings, AI and Tech unicorns started making headlines bringing us to where we are today.
Looking at the table above, a very interesting picture starts to develop. Taking into account the recent market volatility since the start of the year (YTD), Growth stocks have been underperforming against the $Invesco Exchange Traded Fd Tr S&P 500 Equal Weight Etf (RSP.US)$ by -9.15%. This is compared to value stocks that only underperformed the same benchmark by -4.70%.
Extending the look back period to the last 10 years, while both growth and value stocks have generally performed well against the S&P equal weight index, it is clear that the value stocks fared much better, coming in at 164% vs 136%.
Conclusion
As mentioned in the disclaimer at the start, value investing and investing in value stocks may be related but they are not exactly the same. It challenges investors to now start to look at things from a fundamental perspective, starting with valuations against peers and to properly understand the long term growth prospects of a company. This way, it would help the investor to gain a better understand if a company is able to withstand the headwinds in the markets and along with it a very possible recessionary scenario.
Some Value Plays To Consider:
While picking out individual names would be very time consuming given the very discipline required in identifying value stocks, here are some broad based ETFs for you to consider gaining exposure to such value plays:
$Vanguard Value ETF (VTV.US)$ : Tracks the CRSP US Value Index, focusing on large-cap value stocks.
$Ishares Russell 1000 Value Etf (IWD.US)$ : Tracks the Russell 1000 Value Index, targeting large-cap value stocks.
$iShares S&P 500 Value ETF (IVE.US)$: Tracks the S&P 500 Value Index, focusing on large-cap value stocks within the S&P 500.
$Rydex Exchange Traded Fd Trust Guggenheim S&P 500 Pure Value Etf (RPV.US)$: Tracks the S&P 500 Pure Value Index, emphasizing stocks with strong value characteristics.
Do you think the Value vs Growth narrative is back?
Prepared by:
Moomoo Singapore
Isaac Lim CMT, CFTe
Chief Market Strategist
Chief Market Strategist
This report is provided for informational and general circulation purposes only and should not be construed as an offer, solicitation, or recommendation for the purchase or sale of securities, futures, or other investment products. It does not take into consideration any particular needs of any person. This advertisement has not been reviewed by the Monetary Authority of Singapore.
For full disclaimers, please visithttps://www.moomoo.com/sg/support/topic5_935.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
Market Insights
Discussing
Gold price hits new high! Safe havens in a turbulent market?
🎙️Discussion 1. The spot gold price has soared to a new high, with numerous institutions raising their gold price forecasts, would you be m
Riddick705
Apr 9 22:07
Dont Get Smoked!
102321505 : minor mistake in the article... I believe a 10% drop in the market is called "a correction" as opposed to "a technical recession".
The latter would involve quarters of negative GDP, and is not necessarily correlated to the size of market movements.
Cui Nyonya Kueh : seems like not crashing anytime soon
Shark Chaperone 102321505 :![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
Cui Nyonya Kueh : 林老师, could you update the yield curve comparison for next Tuesday please? the previous one shown was done in Jan 2025. Thank you
BuyLowSellHighTrader : its called buy the dip correction
Devip : I'm playing puts on both, pretty far ootm
0livia : I love when the market is good it is the only metric that matters and is spoken about as if it is indeed the economy and when they butt fuck the market it’s not the “real economy”
Viviye : Thank you my financial advisor!!!![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
Falie : This is such an odd downturn since it is so politically driven…
Trader’s Edge OP 102321505 : Yes you are absolutely right. Thank you for pointing that out. it was a typo! Freudian slip perhaps?