a move from growth to value?

This is how the current stock market action is being framed, both in the press and in brokerage strategy reports I’ve been reading lately.

I think this is a reasonable first step at describing what’s going on. It also lines up with the way growth and value indices are constructed. Perhaps just as important in a time of deep political division, it’s anodyne enough not to ruffle anyone’s feathers. It’s also better than nothing. For the same reasons, though, it’s more a starting point than a destination.

the odd construction of growth and value indices

The big index providers, Russell, S&P and the FT, all use variations on the same process.

They take an index that consists of, say, 500 stocks. They use traditional criteria like price to earnings, price to book value, price to cash flow and price to sales, in a formula that ranks the stocks from low to high. They group the 250 (more or less) with the lowest scores (that is, the lowest PE, price/book. price/CF, price/sales combination) together as “value.” The other 250 they label “growth.” They periodically rebalance.

One obvious issue with this approach is that the “growth” stocks are, in effect, a box of leftovers. In a broad enough index, the meme stocks and the SPACs would all be classified as growth. On the other hand, the value category can contain zombie companies that only the most doctrinaire value adherents (e.g., value without a catalyst) would touch–and maybe not even then.

Another is that in today’s world, IT, Communication Services (also very IT-ish) and Consumer Discretionary make up half the S&P and were last year’s best performers. So they’re now basically the growth index. And the value index is everything else.

Does a movement to value mean we should load up on oil and gas, mining, electric utilities and commercial real estate? If so, value is not for me.

More on Monday

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