Friday's Market Minute: Growth Vs Value Inflection Point

Earlier this week, meaningful progress on the pandemic front was announced after Pfizer Inc. PFE and partner BioNTech SE BNTX said their Covid-19 vaccine was highly effective in combating the virus. This compelling news rewarded value investors that held to their beliefs, stuck with their discipline, and shunned growth stocks. Markets continue to behave as if a stimulus deal is likely and that economic lockdowns are unlikely, despite uncertainty around how much protection the Pfizer-BioNTech vaccine and others would provide.

Since the market lows in late March, markets have highlighted the further transition to the "new economy," with sizeable increases in growth-oriented technology stocks such as cloud, e-commerce, and digital ad platforms. Despite the challenges presented by the pandemic, certain key growth companies benefited further from their economies of scale, networking effects, and near infinite access to cheap capital. The dispersion between growth and value returns has widened considerably as Covid-19 forced enterprise to embrace accelerated digital trends to accommodate a distributed workforce and adapt to altered consumer preferences. The current year of value underperformance is extreme both in terms of duration and magnitude. From an investor’s standpoint, the closer medical researchers come to a comprehensive therapeutic or vaccine, the closer the asymmetric dispersion between growth and value will come to reversing course.

Outside of timing a single event inflection point, since 2010, growth stocks have outperformed value stocks on average by 6% a year. If one’s experience runs deeper, or if one appreciates history, the law of large numbers makes a difference. Over the last 100 years, value has outperformed growth by 3.2% a year. Inevitably, when the pendulum swings the other way, value may eventually take the lead again as value companies will benefit from the eventual return to more visible and predictable economic conditions.

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