This has been quite a year for the performance of growth stocks, and their valuations have become quite stretched, while many value stocks struggle to get back to their Jan. 1 levels.
This divergence is one reason some investors expect value stocks to soon have their day in the sun.
The spending argument
Back on Oct. 9, Michael Brush wrote that value stocks were “poised to crush growth stocks” after the November election. That was based on data showing that for the following six months after every presidential election from 1980 through 2016, value stocks had outperformed growth stocks every time — more than doubling the return of the growth group, on average.
One reason is that government spending tends to increase, Brush explained.
When Joe Biden takes office as the 46th president on Jan. 20, the House of Representatives will still controlled by the Democratic Party. However, control of the Senate is still up in the air, pending the outcome of two runoff races in Georgia on Jan. 5.
But even if the Republicans retain control of the Senate, it seems likely that there will be another stimulus bill, based on comments by Senate Majority Leader Mitch McConnell, a Republican, even if the spending is much less than what Speaker of the House Nancy Pelosi (a Democrat) and Biden would like. Then again, Pelosi has said she favors a large federal infrastructure bill, and given that Biden has a history of negotiating successfully with McConnell, there are many possibilities.
The valuation argument
Regardless of what spending we see out of Washington, a quick look at growth stocks points to valuations so stretched that many investors are concerned.
The Russell 1000 Growth Index RLG, -1.92% and the Russell 1000 Value Index RLV, are partially overlapping subsets of the Russell 1000 index RUI, +7.50%. Broadly, the growth group has higher valuations to book value and higher expected growth rates. It’s the opposite for the value group.
Here’s how the indexes have performed this year through Nov. 9:
A quick look at the five largest holdings of the iShares Russell 1000 Growth ETF IWF, -0.98%, which is designed to mirror the performance of the Russell 1000 Growth Index, shows how much forward price-to-earnings valuations have been expanded this year (The Russell Indexes and the iShares ETFs that follow them, are weighted by market capitalization)…
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