Evening Brief – 10.10.23
Growth Vs. Value
It wasn’t long ago that many market analysts predicted that 2023 would be the year when value stocks reclaimed their leadership, as history would suggest. Growth shares, however, continue to outperform in relative terms in 2023.
This year’s top performer is the iShares S&P 500 Growth ETF (IVW), a large-cap fund that has gained more than 20% this year so far. Its value counterpart (IVE) is trailing far behind, with a comparatively small 7.6% increase in 2023.
Despite the recent decline in value, several analysts remain optimistic that it may restore its outperformance.
“While there are no crystal balls, there doesn’t seem to be any strong evidence that the value premium is dead,” recently wrote Larry Swedroe at Buckingham Strategic Wealth.
Meanwhile, small-cap stocks have been hit even harder this year. Even worse for value investors, small-cap stocks have suffered the most, down 3.3% year to date.
The poor performance of small caps this year should come as no shock. During times of market turbulence, investors look for quality, which includes firms with robust balance sheets, high profit margins, stable business models, and growing dividends, which are not often found in the small caps space.
If the ongoing conflict between Israel and Gaza is any indicator, market conditions favorable to small caps are unlikely to arise in the short term.
Higher interest rates are not helping either. While large companies face stronger headwinds when borrowing costs rise, it is more difficult for smaller companies, according to recent research from Ned Davis Research, which advises that these firms are paying a record level of interest expense.
“This is new, uncharted territory for small caps,” says Ed Clissold, Ned Davis’s US strategist.
But perhaps the level of pain will at least stop going up, or so a Federal Reserve official suggests.
“If long-term interest rates remain elevated… there may be less need to raise the fed funds rate,” says Lorie Logan, president of the Federal Reserve Bank of Dallas and a current voting member of the central bank’s rate-setting committee.