The massive rally off of the March lows has been impressive for most stocks and the gains have been especially strong for the growth segment of the market. Using the SPDR S&P 500 Growth ETF (NYSE: SPYG) as a proxy, the growth segment has gained 48.38% since the March low and it is up 11.04% for the year. Comparatively, the SPDR S&P 500 Value ETF (NYSE: SPYV) is up 32.97% from the March low, but the segment is down 14.97% on a year to date basis.
Because that spread between the YTD returns was so great, I decided to look back at 12-month rolling periods to see if any other periods compared. Over the past year, the growth segment is up 17.74% while value is down 6.11%, giving us a spread of 23.85% at this time.
I went back to October 2000, when the SPYG and SPYV were first available, and started measuring the 12-month returns from that point forward. There were four previous instances where the spread between the 12-month return for growth was 15% greater than the 12-month return for value—June ’08, December ’09, July ’11, and September ’18. December ’09 was the only other period where the spread was greater than 20%.
It might not be that clear on the chart above, but the blue arrows mark the previously mentioned time periods. What jumped out at me was that the big disparities between the returns seem to happen ahead of periods of increased volatility. After the period in June ’08, we saw the market roll over and fall sharply.
After the reading in December ’09, we saw the S&P drop around 8% from mid-January ‘10 through the first part of February ’10 and then the S&P rallied over 15% through mid-April. From April 23 through July 2 of 2010, the S&P dropped 15.7%.
The big spread in July 2011 came just as the market started to correct from July 21 through the end of September. The S&P fell 17.8% during that stretch, but then it rallied by 30% over the next six months.
The reading in September ’18 came just ahead of the huge meltdown in the fourth quarter of that year. From the end of September through the Christmas Eve low, the S&P fell 18.92%. Of course, the market would go on to rally over 25% in approximately four months after that big selloff.
I know those are a lot of stats and numbers, but I think there is relevance in the figures. Traditionally when investors are more optimistic, the growth segment of the market outperforms the value segment. The disparity between the returns could be considered somewhat of a sentiment gauge as it is reflective of investor optimism. When the spread between the returns becomes too wide, it could be signaling that investors are too optimistic.
With the earnings season kicking off earlier today, I couldn’t help but take notice of what happened on Monday (July 13, 2020). The main indices all opened with pretty sizable gains and continued to climb throughout the trading session –that is until mid-afternoon. Stocks reversed sharply Monday afternoon and three of the four indices would end up with rather significant losses on the day.
Because I was working on the stats behind this article, I was paying particular attention to the SPYG and SPYV funds on Monday. I couldn’t help but notice that the growth fund made a major reversal on Monday and went from a gain of 1.7% at the high of the day to close with a loss of 1.62%. Conversely, the value fund opened with a small loss and reversed to close with a gain of 0.17%.
I know it is only one day and that certainly isn’t a sign that the trend is reversing, but the timing seemed suspicious with earnings season kicking off the next day.
There are a couple of different ways that the gap between the two segments could close, but they all boil down to value needing to outperform growth in the coming months. Historically when there have been corrections in the market, growth tends to fall more sharply than value does and that is what we saw happen during the 2000-2002 bear market.
If you recall, the dotcom rally in the late ’90s had helped the growth segment of the market outperform value by a wide margin. My wife worked for an investment management firm at the time and her firm was more value-oriented. I can remember her wanting to pull her hair out when trying to explain to clients what was happening at the time. After the big bear market hit, the explanation became a little easier.
Are we headed for another selloff? It’s certainly a possibility. At the very least, based on the instances where the spread between the returns became so wide, we should probably expect greater volatility in the months ahead.