INSIGHTS

On August 17, 2023

It’s Déjà vu All Over Again

For all of Yogi Berra’s famous quotes, one of his greats is, "It's like déjà vu all over again." This is a quote which we believe rings true right now as we appear to be experiencing something we saw just two years ago; or as Mark Twain famously quipped, “History never repeats itself, but it does often rhyme.” We think this is very appropriate for the current equity market. Once again, growth stocks are vastly outperforming value stocks, at levels not seen over the past 40 years. This is the same topic we covered in 2021, but now it may be more extreme. And as we saw back then, what followed the outperformance was a revenge of value stocks in 2022, when they significantly surpassed growth stocks.

Let’s take a closer look at the performance in equity markets this year. We will find, as Twain said, it often rhymes rather than repeats.

The S&P 500 is up 20% through July 2023 which means in seven months the market has returned double its average annual long-term return of 10% per year. Furthermore, growth stocks have outperformed value stocks by almost 25%, again in only seven months. This places the year-to-date outperformance as the third highest in the last 30 years, and if you annualized this outperformance for a full year, it would be the highest ever by a large margin — higher even than 2021, which itself was the highest in history by a large margin and the last time we wrote about this phenomenon.

Yes, in just two short years it is déjà vu all over again.

The chart below shows the excess performance of growth over value by year dating back to 1995. As you can see in the first seven months (dark green bar) we are already experiencing the 4^th highest excess performance in the last 30 years. The only years ahead of it are the internet bubble years of 1998 and 1999 as well as the last time we wrote on this topic after 2020. Furthermore, if you annualize this year’s outperformance, we could have the highest excess performance in the past 30 years, by some 10% over the second highest year and 30% over the third highest year. A truly remarkable run in 2023!

Source: Russell. As of July 31, 2023. It is not possible to invest directly in an index. Indices do not include cash. Past performance does not guarantee future results.

So, what might happen next? The chart below shows each of the recent time periods with strong outperformance by growth stocks (green circles). In each case, after the growth outperformance, we saw them underperform and a resurgence in value stocks (red circles).

Source: Russell. As of July 31, 2023. It is not possible to invest directly in an index. Indices do not include cash. Past performance does not guarantee future results.

When you layer in the fact that overall S&P 500 earnings expectations for the full 2023 are down 4% from where they were to start this year, combined with the strong market performance in 2023, price earnings multiples are rising even higher. This is especially true for growth stocks which trade at a premium to value stocks, but the premium has recently risen. As of July, the relative multiple of growth stocks over value stocks is 210%, a full 50% higher than the premium back at the end of 2019.

This year the top tech stock companies have received a great deal of attention, as they should. Not even discussing specific stocks that have had meteoric P/E (price-to-earning) multiple increases this year, some companies have also seen a dramatic rise in their multiples especially relative to pre-pandemic levels. We believe this leaves these stocks especially vulnerable. If you were to exclude just these seven stocks from the S&P 500, the rest of the S&P 500’s P/E Multiple falls from 21 to 16. We believe a much more reasonable multiple given the current macro environment.

But this is not where the story ends — there is more; growth stocks are not the only stocks significantly outperforming, so are high beta stocks. When we look at the performance of the highest beta names (top quintile) and compare that to the lowest beta quintile stocks, we find that the highest are outperforming the lowest by 12% this year through July. While one would think the high beta stocks are already included with the top tech stocks, they aren’t. So, this is a separate effect, but what does it mean? It means growth is significantly outperforming, and separately high beta names are outperforming — risk-on!

Overall, risk is dominating the market which we believe will lead to greater volatility and more differentiation across stock performance going forward. This is the point in the story where we believe “déjà vu all over again” will hold as well. As we saw in the first chart, after significant growth outperformance, value tends to outperform. We believe with multiples being stretched in growth and high beta stocks, value (dividend payers) and lower beta (volatility) stocks are much more attractive going forward.

We conclude with another great Yogi Berra quote, “No one goes there nowadays, it’s too crowded.” We believe it is a great time to leave the crowded growth/beta train and hop on the dividend/low volatility express.

CRN: 2023-0817-11067 R

Opinions in this piece are those of Hartford Investment Management Company and are not necessarily that of AAM.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.