In last week’s Factor Spotlight, we revisited the Growth vs. Value debate. We highlighted the factor and sector drivers that characterized the 2021 rotation that has seen Growth fall out of favor and Value come back into style. Of course, the Growth vs. Value story has been a prevalent story for investors for quite some time, but why is it necessary to consider these themes today?
Let’s put some historical context around the story. To start, we can look at the annual (YTD, for 2021) Growth and Value factor returns from the Axioma US 4 Medium Horizon (“Axioma US”) risk model back to 2007.
When comparing the 2020 and 2021 Growth and Value factor returns to historical trends, several meaningful insights emerge. 2021 has seen the most substantial return to Value since 2012, and 2020 was punctuated by the best Growth year since before the Global Financial Crisis (GFC). However, possibly more notable than either of these observations is the massive outperformance of the Value factor relative to the Growth factor that followed one of Growth's strongest years. We haven’t seen such a large and rapid rotation from Growth to Value for the entirety of the risk model history.
The current landscape of Growth vs. Value isn’t just a story about returns but also one of risk and correlations.
The current predicted volatility of the Growth and Value factors from the Axioma US risk model are at levels higher than any since the GFC recovery. Though the Value factor volatility has been declining since March 2020, it’s still well above the recent peak in 2016. Interestingly, while Value’s volatility has been declining, the volatility of Growth has remained steady at elevated levels.
The magnitude of the Growth vs. Value correlation has also reached new heights in 2021.
The predicted factor correlations between Growth and Value are at astonishingly high magnitudes. Moreover, since 2007, there has not been a period with a stronger inverse relationship between these two factors.
As we face an unprecedented environment around Value and Growth, it is prudent to dig deeper to understand how prevalent these relationships are across various pockets of the market.
A Sector Lens to Growth vs. Value
Using the Wolfe Research QES US (“Wolfe US“) Sector risk models, we can deep dive into each sector to determine whether or not the dynamics highlighted above for the broad US market still hold.
Not only do the sector models calculate factor returns using relevant assets within the sector, but they also offer additional specificity for the factor definitions. For example, while broad market models typically define Value using book-to-price and Growth utilizing some combination of EPS & sales historical and forward growth, the Wolfe US sector models take a sector-specific view when defining these factors. This view allows for more precision when measuring the systematic drivers that are most relevant to each sector.
The 2021 cumulative performance of Growth relative to Value (calculated as Growth factor return minus Value factor return) across the sector models shows that the broad market trends hold in some sectors but not all.
Health Care and Financials have Growth vs. Value performance similar to what we saw in the broad US market. This makes intuitive sense given these were two of the sectors that drove the broad US market Growth vs Value trend. However, other sectors tell a divergent story, with Growth strongly outperforming Value within Consumers and Energy in particular. The first half of 2021 was more substantial for Growth within the TMT space, but this has reversed course in the latter part of 2021. The Growth vs. Value story was not very strong for Industrials.
A view at the predicted factor correlations in 2021 within each sector model shows even less consistency with the broad US market trends.
Health Care and TMT generally have had positive correlations between the Growth and Value factors within the respective sectors. In contrast, the rest of the sectors show correlations that flip from positive to negative and vice versa. While there is no clear conclusion drawn from a comparison of correlations across the sectors, it is evident that the relationship between Growth vs. Value is very different within sectors compared to the broad US market, where the negative correlation trend is very robust.
Unprecedented Times for the Growth vs. Value Debate
The above analysis illustrates that we may be in uncharted Growth and Value territory, not only across the broad US market but also within sectors. The expected behaviors of these factors have blurred in the post-COVID market environment. While the ever-present Growth vs. Value debate focuses on the broad market, sector specialists should be aware that the discussion translates to the market's sector pockets as well. It's arguably more important for investors to be mindful of these dynamics to avoid dangerous assumptions that the broad Growth and Value behaviors will also translate to the sector level.
US & Global Market SummaryUS Market: 11/08/21 - 11/12/21
- Stocks rallied on Friday, but still posted their first losing week in six amid heightened inflation fears.
- The consumer price index rose 6.2% from a year ago, the most since December 1990. The growth was driven by soaring energy prices and ongoing supply chain backlogs.
- A record 4.4 million people quit their jobs in September, while job openings remained unchanged at 10.4 million, according to data released on Friday by the Bureau of Labor Statistics.
- Consumer sentiment in early November dropped to its lowest level in a decade, the University of Michigan reported Friday. Many survey respondents cited inflation concerns, according to the report.
- Johnson & Johnson announced it will split itself into two publicly traded companies, separating its pharmaceutical and medical devices divisions from the consumer products business.
Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)
Methodology for normalized factor returns
- Earnings Yield’s 6-week upward trajectory went into an even higher gear to finish atop this week’s U.S. factor leaderboard.
- Profitability maintained its recent strength to cross into positive terrain and land at +0.21 SD above the mean.
- Medium-Term Momentum moved up for a 3rd straight week followiing a 2-month decline and inched closer to the plus column.
- Growth slid one week after leveling off a sharp upward trajectory.
- Size weakened for the 2nd straight week and crossed into negative terrain.
- Value continues to see weakness after bottom finishes over the past 4 weeks and currently sits at -0.51 SD below the mean.
- Market Sensitivity broke out of an extended lull to the downside and finished last in this week’s leaderboard.
Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Methodology for normalized factor returns
- Profitability finished at the top spot for the the 3rd consecutive week and moves closer to Overbought status.
- Earnings Yield saw another strong week as it crossed the mean.
- Momentum moved upward for the 3rd straight week following recent extended weakness.
- Growth crossed over to Oversold status and currently sits at -1.16 SD below the mean.
- Market Sensitivity (Beta) continued its trend of recent weakness moving further away from Overbought territory.
- Value continued to plunge and barely missed finishing at the bottom of the leaderboard for the 5th straight week.
- Exchange Rate Sensitivity slid hard once again to exit Overbought status.