2 Signals That It's Time To Shift From Growth Stocks To Value Stocks

Growth stocks have left value stocks in the dust throughout most of the 10-year bull market, and that trend has continued so far in 2019. The market tide will eventually turn back to value investing, however, and traders will need to know when to pivot their strategies.

A Simple Explanation

Year to date, popular growth fund ETF PowerShares QQQ Trust, Series 1 QQQ is up 15.6 percent, while the value-oriented iShares Select Dividend ETF DVY is up just 9.4 percent. DataTrek Research co-founder Nicholas Colas said Wednesday there’s a simple explanation for why growth is beating value and it can also give traders two areas to watch for potential strategy shifts.

The largest allocation of S&P 500 growth stocks is to the technology sector at about 25 percent. Value stocks, on the other hand, are skewed almost as strongly to the Financial sector at 21 percent allocation. Small-cap value stocks are skewed even more heavily toward the Financial sector at 24 percent.

Colas says he is often asked when will be a good time to start investing in value stocks over growth stocks.

“Our answer based on what has happened over both the last 12 months and just 2019 is simply ‘when Financials start to work and, for Large Caps, when Tech underperforms,’” Colas wrote in a report.

All About Tech

So far in 2019, the Financial Select Sector SPDR Fund XLF is up 7.1 percent while the Technology Select Sector SPDR Fund XLK has more than doubled that return with a 17.8 percent gain.

From a historical standpoint, Colas says the shift in outperformance from growth to value stocks tends to happen near the bottom of an economic cycle, such as the ones in 2002-2003 and 2009.

“Since we are not near that point just yet, the safe bet remains Growth,” he wrote.

More Of The Same

While there will certainly be outliers among financial stocks and value stocks in the near-term, Colas said it’s not a good idea to expect value stocks to make a comeback anytime soon.

In the meantime, traders can be watching for signs of a slowdown in the technology sector and/or signs that the financial sector has come back to life. Either or both of these indicators may be a signal that a much larger shift in investor sentiment is taking place and that value stocks will once again be in vogue after roughly a decade of underperformance.

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