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Charting the Market: Is the Value Rally Sustainable

By:

Head of SPDR Americas Research

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.

Value versus Growth Rolling Three Month Returns

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Footnotes

Bloomberg Finance L.P. as of 05/31/2020, based on the S&P 500 Pure Growth and S&P 500 Pure Value Index returns from 5/15/2020 to 5/31/2020.
Based on a composite metric of Price-to-sales, Price-to-Earnings, Price-to-Next-Twelve-Month-Earnings, Price-to-Book, and Enterprise value-to-EBITDA for large,-mid-,and-small-caps. Large cap as defined by S&P 500 Index, Mid Cap as defined as S&P 400 Index, and Small Cap as defined as S&P 600 Index. To determine large versus mid and large versus small ratios of the fundamental metrics for Large Core, Large Value, Large Growth were compared to Mid Core, Mid Value, Mid Growth as well as Small Core, Small Value, Small Growth, respectively. To determine growth versus value, ratios of the fundamental metrics for Large Value, Mid Value, and Small Value were compared to Large Growth, Mid Growth, and Small Growth. Ratios were normalized by calculating a Z score for each. To calculate a composite score, every fundamental metrics Z score was averaged together. Based on data from 1997 to 2020.

Glossary / Definitions

S&P 400 Pure Growth Index
Focused on mid-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.

S&P 400 Pure Value Index
Focused on mid-caps, S&P Pure Value Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.

S&P 500 Index
A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.

S&P 500 Pure Growth
Focused on large-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.

S&P 500 Pure Value Index
Focused on large-caps, S&P Pure Value Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.

S&P 600 Pure Growth Index
Focused on small-caps, S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.

S&P 600 Pure Value Index
Focused on small-caps, S&P Pure Value Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score.

S&P 1500 Composite Index
The Standard & Poor’s 1500 Composite is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500, and the S&P 600.

Originally Posted on June 10, 2020 – Charting the Market: Is the Value Rally Sustainable

Disclosures

The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Passively managed funds hold a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.

Actively managed funds do not seek to replicate the performance of a specified index. The strategy is actively managed and may underperform its benchmarks. An investment in the strategy is not appropriate for all investors and is not intended to be a complete investment program. Investing in the strategy involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Volatility management techniques may result in periods of loss and underperformance may limit the Fund’s ability to participate in rising markets and may increase transaction costs.

A momentum style of investing emphasizes securities that have had higher recent price performance compared to other securities, which is subject to the risk that these securities may be more volatile and can turn quickly and cause significant variation from other types of investments.

Investments in small-sized companies may involve greater risks than in those of larger, better known companies.

Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.

Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Because of their narrow focus, sector funds tend to be more volatile.

Investing involves risk including the risk of loss of principal.

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