Value Overweight Will Pay Off in the Long Run

Earlier this year, we wrote an article about all the focus on a market bubble. Our perspective was a bit different in that, while we agreed to some extent that the S&P 500 looked stretched, the driver of valuation extremes were growth stocks – and particularly, just a handful of them. We took that opportunity to break down the S&P 500 into it’s growth and value components and called for a value overweight. In the article, we highlighted how growth and value are defined by both Standard and Poors and Russell, which were similar but did have some slight differences.

With growth stocks outperforming value stocks over the last 12 years or so, we looked at how this relationship has changed over time as well as the inherent differences in the sector makeup of each of those components of the S&P 500.

We suggested at the time that value was looking increasingly attractive and that tilt has worked so far this year.

Value outperforms growth

It seems we weren’t alone in that assessment as equity positioning quickly went from an extreme growth overweight to an extreme value overweight. In fact, for my statistician readers, the level of extreme had reached 2 standard deviations towards growth before the abrupt reversal. For those of you that need a reminder, in a normal distribution, 95% of all data points lie within 2 standard deviations of the average. So the growth overweight was at levels it only gets to around 2.5% of the time. Now, we’ve headed in the other direction and reached the other extreme.

Until the last few days, value stocks looked like they had some momentum relative to growth stocks. They’ve given back some of those gains recently, but we believe the rotation into value is still intact and it will be so for the long-term. Stay the course.

Value overweight