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Value vs. Growth Investing – Are Tables Turning?

November 11, 2020 By Mircea Vasiu

The coronavirus economic recession differs from all the recessions known so far. Being generated by a health crisis, it involved more than GDP contraction – it changed the way consumers behave. 

Shopping changed. People used to socialize more, liked to go to malls, watch a movie, spend time outside, travel. All these have disappeared almost completely since March. Yet, the stock market outperformed.

However, we should view the stock market via its different components. Companies belong to different sectors and are part of various indexes telling us much about what went and what is going on.

Stock Market During the COVID-19 Pandemic

In our analysis, we will use the U.S. stock market for the single reason that it is the most developed in the world. To start with, the stock market is responsible for the so-called “wealth effect.” Economic evidence shows that people are inclined to spend a bigger part of their income and save less as the stock market advances. Obviously, the opposite is true.

To fight a recession, therefore, one of the goals is to prop the stock market up. Even if people receive money for free (i.e., helicopter money), if they save more than they spend, the economic recovery will be delayed.

In March, the stock market tanked. All of the U.S. indices collapsed, with some more than others. Nasdaq 100, for example, quickly recovered and made new all-time-highs. Not one, but more all-time highs during the pandemic. These are growth stocks, and people bought them because of the shift in consumer behavior everyone observed. The idea is that these stocks will outperform the overall market over time, having increased potential while pandemic conditions hold.

At the same time, value stocks found buyers too. Even during the initial months of the pandemic, investors bought value stocks like cruisers and airlines in the hope that the prices they get are well below the intrinsic value of those companies. However, there is still a catch – how long can a company remain in business when the bulk of its operations is restricted? Therefore, it was always a gamble or a fine balance between the ability of a company to survive the pandemic and avoid bankruptcy.

Nevertheless, value stocks grew, but not to the same extent as growth stocks. With Monday’s announcement that a vaccine may be close, value stocks exploded higher. Guess what growth stocks did?

Dow Jones outperformed Nasdaq 100 by a lot. The Russell 1000 Value Index also outperformed Nasdaq 100 by the most since 2008.

It is not to say that tech companies and the Nasdaq 100 index are doomed from this moment on. It is just a sign that a big rotation out of growth and into value may have started. The closer we come to the end of the recession, the more the value stocks will outperform.