Growth vs. Value

The battle between growth and value stocks is an ongoing one. Some investors favor growth stocks, those generally with faster sales and earnings growth, believing their stocks will follow their sales and earnings trends higher. While other investors favor value stocks, or those with prices that appear to be inexpensive relative to their current earnings and dividends, believing these will outperform and provide some downside protection.

The fact is that over the past 30 years these two groups of stocks have delivered relatively similar long-term returns. As the graph shows, growth stocks, in blue, have surged ahead in 2020. From December 1990 through September 2020 growth stocks have delivered a +10.9% compounded return compared to value’s +9.7%. Just 9 months ago though value stocks had been leading over the long-term.

Source: https://finance.yahoo.com/ and Patton analysis; Growth = Russell 1000 Growth; Value = Russell 1000 Value

Although the long-term returns were nearly identical for 29 years through the end of 2019, clearly there are times when one leads the other as we have seen by the surge in growth stocks in 2020. The graph below shows the difference in 1-year returns, on a monthly rolling basis, between growth and value stocks. Bars above 0% tell us that growth stocks have outperformed value stocks during the prior year and visa versa. As it shows, the recent rally in growth stocks relative to value has never been so extreme as it has been the past year.

Source: https://finance.yahoo.com/ and Patton analysis; Growth = Russell 1000 Growth; Value = Russell 1000 Value

This September was the first month since September of 2019 that value stocks performed better than growth breaking an unprecedented 11-month winning streak for growth stocks. Only time will tell us if the is just a pause the in the strength of growth stocks or if the cycle is shifting longer-term.

This Week’s Performance Highlights

Source: www.YCharts.com

Economic Indicators

The U.S. economy added 661,000 jobs in September falling short of economists’ estimates of 800,000 and less than half the prior months 1.489 million. These added jobs continue the rebound that started in May following the loss of more than 17 million jobs in March and April. During the last 5 months we have seen approximately 10.5 million jobs added leaving 6.8 million more people unemployed today than pre-pandemic.

Source:https://www.bls.gov/charts/employment-situation/civilian-unemployment.htm

The unemployment rate fell to a new pandemic low of 7.9%, lower than economists had forecast, from 8.4% the month before. Pushing the rate lower was 700,000 people exiting the labor force, in other words giving up on finding a job and no longer counted as unemployed, due to the scarcity of jobs available.

In a separate report new jobless claims for the most recent week came in at 837,000. This was generally inline with forecasts and down from the previous week’s 873,000. In remains about 4 times higher (per week) than pre-pandemic levels.

Pre-pandemic the economy was adding a little less than 200,000 jobs per month. At this pace it will take another 34 months to fully recover to pre-pandemic employment levels. Of course, the recent 5 month rebound could continue which would shorten the full recovery time while, on the other hand, the economy could slow and lengthen it. It’s really impossible to know but everything points to the recovery likely being measured in years and not months.

Personal income fell by -2.7% in August while spending increased by +1.0% as consumers dug into savings. The drop in income is being blamed on the lack of government support and the ending of the $600 per week federal unemployment benefit. Although personal income declined it is still +2.0% higher than in February pre-pandemic as illustrated in the below graph.

Source: https://fred.stlouisfed.org/series/PI

Home prices continue to rise with the Case-Shiller National Home Price Index up +4.8% in the most recent month compared to +4.4% the month before. Generally, there was strength in the Southeast and West while the Northeast and Midwest lagged.

Consumer Confidence far exceeded economists’ expectations coming in at the highest level during the pandemic at a reading of 101.8 compared to 86.3 a month earlier. Somewhat surprising and contradictory to the employment reports discussed above, consumers are taking a more favorable view of current business and labor market conditions and have optimism about the short-term outlook. A component of the report measuring future expectations surged to 104.0 from 86.6. Although this is a good report, the numbers remain well below pre-pandemic levels.

Upcoming Economic Reports