“Marcia, Marcia, Marcia.”
-Jan Brady
“Thinking back on the finer days. Remembering the pendulum swings both ways.”
-James McMurtry, “Candyland”
Like Jan Brady, value players seem to be stuck as the middle child. Never the prettiest, certainly not the sexiest and definitely not the coolest. I mean Jan was forced to wear her glasses, create fake boyfriends and toil in obscurity as Marcia brushed her hair 100 times a night. Value investors seem to be perpetually stuck in much the same manner as our heroine.
And yet, there are times where the forgotten player in this drama gets a shot. And maybe, just maybe the timing is good, and the cosmic cycles align and low and behold, we have ourselves a coming out party.
I think we may be getting close to just such a party in Valueland.
It has been years of drift for the value players. Watching a government sponsored liquidity grab from the sidelines, a few teasing opportunities like 2018 rate tantrum and well, frankly, not much in between.
But maybe that is beginning to shift.
I mean, Value vs Growth has been a long cycle trade no matter which side of the fence your trading preference lies.
In the aftermath of the 2000 .Com crash, we witnessed a tremendous move higher in Value over Growth. The chart below shows the period between 2001 and 2013 using the Russell 1k Value and the Russell 1k Growth ETF’s.
VALUE VS GROWTH (CONT)
As you can see above, the performance over the 13 years from 2001-2014 was about 6.5x in favor of the IWD (Value) over the IWF (Growth).
The performance differential actually peaked in 2007. Over the 6 years, pre-GFC, Value was up 70% and Growth was down (-21%).
But as you can see below, these winners can be fleeting, particularly when the FED comes calling and promotes liquidity.
See the chart below:
VALUE VS GROWTH (CONT)
As you can see below, the return over the 7 years (roughly) since late 2016 has been about 5.5x in favor of Growth.
But that return has nearly doubled since the 2022 lows and was given another boost post SVB liquidity in March 2023.
The question ahead of us is simple: If the rate game is going to stay embedded at higher than expected levels and the economy is growing, will that lead to a bid in Value issues over Growth?
From a cycle perspective it is absolutely worth considering the potential thesis and in particular the Asymmetric return possibilities within this idea.
I mean, think about this. David Einhorn complained a few months back that passive managers have broken the market. Now, markets evolve and it is a bit hard to have sympathy for a billionaire who’s investing style has gone out of favor (as he clearly forgets how good he had it when his style was in favor), but he has a point. The sheer dominance of passive investing makes it very difficult for single-name value managers.
But what if things were to shift?
I suppose, we could argue that with a few turns of the investing allocation dial, the passive investment dollars that have been flowing into Growth, could in fact switch to Value. The dollars can still be passive. This isn’t single name, rather it is driven by the models that make up client investment pool. And if Value begins to perform better than growth for a certain amount of time, well then, you will see dollars flowing into Value.
And if that happens, you will see a retreat in the concentration affliction we have in the SPX and NDX.
And if that happens you will see the bottom tier stocks begin to do better at the expense of the Mega’s.
And if that happens the SS Positioning boat, which is heavily tilted on the Mega/Growth side will begin to normalize.
GROWTH VS VALUE (CONT)
Interesting Daily Chart in Growth/Value. Covid produced the ripper, ‘22 bear market produced a nearly full retracement of the rally…but then SVB and the Regional Bank Crisis hit (coupled with AI and LLM rallies) and growth reaccelerated.
Monthly look at Growth/Value since 2000.
Best daily % gain for value on Friday in the last 3 years.
GROWTH VS VALUE (CONT)
At a minimum, I am looking to structure this as a spread trade (Long IWD - Value/ Short IWF - Growth). I think Ol’ James might be right, and the pendulum will start swinging both ways again.
Keep an eye on it.
DAILY NOTES
Caught a guy on CNBC yesterday talking about the breadth getting better in SPX on Friday and this morning, said analyst is out with this nugget: 79 stocks in the SPX have made a new 10-day high and 33 a new MTD high.
I mean, sure. But again, these facts are a bit in the weeds as to why we are seeing these results. What I mean by this is simple. Other than the acceleration phase that occurred in November and lasted until mid-December, we have not seen stocks acting together. We have seen divergences. And we are seeing it again. Mega’s off their highs is helping the stocks that many a L/S book has on the Short side of the ledger. The PM covers some of his position by selling Longs (megas and momentum) and buying their shorts in (value etc).
I am not saying that I am always right, but man I hate first level thinking by analysts. Cheap copy sale.
MS out with a note showing continued Disinflation in Rent prices. They stand by a downward, albeit bumpy path ahead for inflation.
TSLA eps today after the close. Stock has been just obliterated…down -43% YTD. Normally I would be trying to get long, but I can’t find a good trade in here. Doing nothing.
Interesting chart from GS on Intraday Volatility from last week vs the Close over Close volatility. I would suspect that some of this had to do with headline risk (Israel/Iran) and option Ex gamma squeezes…but worth a peek. I would suspect that for day traders, it had to be the best opportunity week in several months. Let’s see if it continues.
Nature magazine with a great primer on Complexity.
Finally got the break lower in Coffee…down -10% in the last 5 sessions. Still cannot understand why specs bid up the market. Elevator down.
Utilities remain very light in terms of historical positioning…couple that fact with this fact: Since March, the XLU has outperformed the SPY by about 10%.
Don’t look now, but GS, has rallied back to its ATH area of $418…all without the Ticker Tape.
Gold and Silver lost about -2% during the Asian market last night…in about 15 minutes of trading action only. Both products are now back to the selloff point. Crazy action.
Trade Em Well Today