Growth had its multiyear run... Now it's time for value.
As you know, once the dust settled from the financial crisis, growth was all the market cared about.
Interest rates were near zero. Companies were able to borrow on the cheap to chase sales growth. Investors piled into growth names and didn't care much about profits.
But that backdrop of zero-percent rates changed at the end of 2021.
Since borrowing costs moved higher with interest rates, corporate spending has gotten more expensive. That's why every other day, we're hearing news about some tech company cutting jobs.
Alphabet (GOOGL) announced it was laying off about 12,000 employees. Salesforce (CRM) cut roughly 10% of its workforce, about 8,000 jobs. And social media company Snap (SNAP) laid off 20% of its employees last year.
According to Crunchbase News, more than 77,000 workers in U.S.-based tech companies have been laid off so far in 2023.
These companies overhired to pursue growth... When interest rates were low and markets rewarded rising sales, that was the right strategy to drive stock prices. Now, with interest rates at multiyear highs, these companies have to scale back.
We're seeing this reflected in the stock market, too. In short, growth is now out of favor. Value stocks are in...
The past couple years have taught us that growth does not go up in a straight line forever... and that we need sources of energy... transportation for our supply chain... commodity metals to get pulled out of the ground... and robust utility infrastructure to keep the lights on. We need companies that produce real things.
Of course, investors haven't cared about those kinds of stocks for nearly a decade now. They're too boring.
That has changed.
Value stocks are defined as stocks with low valuation multiples compared with either their historical averages or a broader index. They're often known as companies with slow top-line growth but lots of profit.
Think of stocks like CVS Health (CVS) and Shell (SHEL).
You can see the shift in the market's appetite in the two charts below...
The first chart tracks the ratio between growth and value stocks. While growth led the way in 2019 and 2020, value has started to inch back into the spotlight...
The second chart looks at a longer time horizon. If you compare the 10-year returns of value and growth, you'll see a cycle through history. And you'll also see we're dramatically low on the cycle right now – favoring value...
This transition makes sense if you follow this historical cycle. Also, given that investors are worried about a coming recession, people will want to own value stocks because there's safety in cash flows.
Value should continue to outperform growth... not only in the short run, but for many years to come.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: You can find more insights from Doc and his team by signing up for his free daily Health & Wealth Bulletin. Recent essays have covered how to "rehab your mind" after heart surgery... why the latest recession fears could actually drive the market higher... how to achieve your fitness goals with a simple technique... and many more ideas for improving your wealth and well-being in retirement. Check it out right here.
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