Chart of the week

Flexibility paramount amid value-growth transition

Value stocks are showing signs of life as rates rise. This week’s chart looks at the change and suggests flexible mandates are more important than ever.

March 5, 2021 | 2 minute read

Spread between S&P 500 value and growth stocks

Source: Bloomberg Finance, L.P., as of March 3, 2021. Value represented by the S&P 500 Value Index; growth represented by the S&P 500 Growth Index.

  • Investors recently have shown signs of balancing the broad-based economic optimism that has pervaded markets for much of 2021 against potentially significant changes to the narrative that has characterized equity markets for most of the past decade. Specifically, the slow growth, low interest rate environment that prevailed through much of the post-financial crisis period appears to be changing, and quickly.
  • A host of Wall Street banks in Q1 have upgraded their expectations for U.S. economic growth in 2021 to well above pre-pandemic levels. Meanwhile, the pace of the 10-year U.S. Treasury yield’s climb has sharpened dramatically in the past two weeks as markets begin to price in higher economic growth and inflation.
  • Against this backdrop, the composition of equity returns also has shifted significantly. The chart shows the spread between the S&P 500 value and growth indexes, highlighting how dramatically value stocks have underperformed growth stocks over the past 15 months.1
  • Over the past month, however, value stocks have reasserted themselves. Value has considerably outperformed growth as higher-valuation growth stocks have become relatively less attractive than their value counterparts, a common occurrence amid rising rate environments.1
  • Of course, one month does not make a trend. But higher-growth environments have implications for market leadership and could lead to bouts of volatility as markets try to determine if the new growth regime is sustainable. With this in mind, flexible investment mandates with an ability to quickly shift between value-growth and cyclical-defensive stocks could be paramount in navigating market changes.

  • Bloomberg Finance, L.P., as of March 3, 2021. Value represented by the S&P 500 Value Index; growth represented by the S&P 500 Growth Index.

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