During the 4th quarter, Growth beat Value handily in the S&P 500, but there weren't similar performances in either the smaller capitalizations or in the Russell indices. For the year, it was a similar story, except that smaller stocks, particularly as measured by the Russell 2000, showed a large bias in favor of Value. Well, as the first month of the year is nearing an end, we are experiencing a rare but dramatic bias in favor of Growth:
The two index companies use different methodologies to define Growth and Value, and the indices actually include some overlap between Growth and Value (making the differences even more pronounced). What's going on? A big part of the story is composition:
Clearly, Growth has a very large bias towards Technology and Energy and against Financials. This is also the case for the Russell 1000, but the Energy differential isn't present there. For the Russell 2000, the largest bias is towards Healthcare, with a smaller bias towards Technology and a more pronounced negative bias towards Financials. As you can see in the S&P 500 returns below, most of the differential between Growth and Value is a function of these large biases:
Attentive readers will note that Energy is omitted. Unfortunately, the S&P website hadn't updated that number for some strange reason, but it is up about 2 or 3% YTD and thus contributing to Growth's favorable relative performance.
While it is easy to dismiss the move as solely a rotation from Financials to Tech, I believe that the bigger picture is that investors are rotating away from sectors with balance sheet risk to safer areas in that regard. Note that Industrials, many of which have embedded credit operations, and Telecomm Services are also faring poorly, while Energy, Health and Tech represent the best balance sheets by sector. This ties into a major theme for 2009 that I shared recently. So, I guess I am not that surprised to see investors moving in this direction.
As far as its implications for market direction, I don't believe that there are any. It is unlikley that Growth Stocks will advance significantly until investors become more comfortable with heavily leveraged companies that tend to populate the Value indices disproportionately. The bigger takeaway is that Growth stocks, at least those with relatively strong balance sheets, should weather the storm better, and we are seeing that thus far in 2009.