Charting the Market: Is the Value Rally Sustainable
Our research indicates the value rally has been driven by a course reversal in stocks that are heavily shorted
Much like other “fits and starts” for value over the past few years, this rally may not be overly sustainable
Ferris Bueller offered sage advice: “Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.” The same applies to this market. It’s moving fast, and if you don’t stop and look around, you may miss a turn in sentiment.
One trend noted during the last two weeks of May was the 4.1% outperformance of large cap value stocks over large cap growth stocks.1 During this two-week run, value had one of its best five-day periods since 2009. But there is a caveat: These strong returns originated from a position of weakness, as growth had been leading value for some time. Overall, growth outperformed for the full month of May as end-of-month strength was not enough to overcome the 8% lead built by growth during the first 15 days of the month.
Here we take a deeper look into the recent value rally and explore whether it’s another “fit and start” or the beginning of a new trend.
Starting from a low point
As shown below, the rolling three-month performance dispersion between growth and value is currently 22%, which corresponds to the 96th percentile. Interestingly, however, this high level of dispersion is still 63% less than the all-time high dispersion of 53%, reached in 1999.
Source: Bloomberg Finance L.P. as of 05/31/2020. Past performance is not a guarantee of future results. Figures shown are based on index data and do not assume any fees. Returns based on the S&P 500 Pure Growth Index and S&P 500 Pure Value Index.
So, while the dispersion is currently high, it is not at maximum levels—and this holds true across various measures. As shown below, standard cap-weighted rolling three-month growth to value dispersion is 12% for large caps, below its max of 16%. The pure-factor weighted dispersion illustrated in the chart above is much wider in terms of magnitude, but also further from its max. This difference also holds true for mid-cap stocks. In the small-cap space, the pure-factor weighted dispersion is lower than the cap-weighted composition. The spread is still positive, however, as growth has outperformed value in every segment.