A typical bull market progression
The first half of a typical bull market belongs to value investors, the second half to their growth counterparts. The general idea behind this is that the outperforming stocks at any moment are those that are showing the strongest earnings growth.
Value stocks tend to be more sensitive to the rhythms of the overall economy than growth stocks. So value tends to outperform during the part of the economic cycle when pent-up demand from a just-ended recession starts kicking in and the economy is expanding at a rapid clip. As the cycle ages and the economy settles down to a slower, but still healthy, expansion rate, growth stocks, with their strong, but less economically-sensitive results, come to the fore. Growth continues to outperform from this point through the end of the subsequent economic slowdown.
At first, the 2009 bull market looks like this..
On the surface, the 2009 bull market in the US seems to be following the traditional pattern. With the index (I’m using the Russell 1000 as the benchmark–it’s big cap, like the S&P 500, but has wider coverage) up 62.8% from March 9 through November 30, value stocks (Russell 1000 Value index) are up 66.8%, while growth stocks (Russell 1000 Growth index) have risen 59.4%.
…but it really isn’t
When we look a little deeper, though, the usual pattern breaks down. Instead of outperforming for a year or more, value stocks lose their relative acceleration after only two months. They move more or less in line with growth stocks for the subsequent four months, after which they begin to lag. The numbers are as follows:
Russell Value +40.0% +19.1% -.03%
Russell Growth +30.0% +17.9% +4.0%
What does this mean?
Of course, it’s always risky to draw conclusions from relatively limited amounts of data (on the other hand, this is what stock investors always do–when the total picture is in, the market has long since discounted it). To me, though, the truncated period of outperformance of value stocks suggests that the market is much more aware than bears would give credit for that this is a very unusual and weak recovery. Instead of the 5%-7% real economic growth that marks the early quarters of bounceback from a typical inventory cycle recession–and characterized by consumers and businesses rushing to satisfy pent-up demand, the early shunning of value suggests the market has much lower expectations.
It’s also interesting–maybe even correct–to note that about the time that companies were getting a firm sense of what the September quarter would look like, Wall Street started to rotate toward less economically sensitive growth issues.
The message I get from the numbers–one which applies only to the US and must be subject to constant potential revision–is that the market thinks that stocks in general will not go rushing higher from here for some time. The sectoral rotation in search of laggards that seems to be starting in the market suggests the same thing. The apparent focus on the stronger, faster-growing market components does too.
This would imply that, although the overall market may provide a stable base for investors to stand on (in other words, the bottom won’t drop out of the market), good individual stock selection will provide the key to investment success next year–or at least until the overall economy regains a lot more of its “normal” strength.
This is not bad news. In fact, it would be pretty good, if true, considering the horrible beating the US economy has taken from the financial crisis. The positive message would be that there’s a chance to make good money next year by being in the right stocks.