Striking a Balance: Navigating Growth and Value Investing in Today’s Market

By Dean Austin, CFA, CAIA,
Senior Investment Consultant, Synovus Trust Company

U.S. history is punctuated by a series of watershed moments that have shaped our nation’s history. The “Roaring 1920s” through “The Great Depression,” for example, saw a spectacular rise followed by the equally dramatic fall of the stock market. World War II was followed by 20 years of worldwide economic growth through the early 1970s called “The Golden Age of Capitalism.” The 1970s “Oil Crisis,” the “Tech Bubble” of the 1990s, and “Global Financial Crisis” of 2008 are all events that, for better or worse, were defining periods in history with far-reaching economic impacts.

Through it all, value investing has long held a structural advantage over growth investing when considered over multiple market cycles. But like fashion, investment styles cycle in and out of favor, and sometimes quite abruptly. After wandering aimlessly in the wilderness for 17 years, circa the “Great Financial Crisis” (GFC) in 2008, value investing may finally be ready to rejoin civilization and take its rightful place beside its growth counterpart. The halcyon days of growth are certainly not at an end, but finally strong signs that the tide is turning in favor of value stocks deserves our attention. As we navigate through the back half of 2024, the question looms large: Will growth continue to reign supreme over value, especially with a widely expected decline in interest rates? The answer may lay in the atypical turn of events witnessed in 2023. More on this topic later.

Value and Growth Defined

Investors have long held distinct definitions for value and growth stocks. Value stocks are typically characterized by well-established companies with stable profits, trading at a discount to their true value. These companies often boast reliable and sustainable business models, frequently paying dividends due to their consistent cash flows. Think banks, energy and industrials.

Alternatively, growth stocks are perceived as companies with the potential to outperform the market in the future, even if they may currently be unprofitable or expensive. These stocks are riskier and more volatile, with a focus on innovation and future growth prospects. Think information technology, consumer discretionary and healthcare.

Value and growth as it pertain to investment styles have been positioned as being diametrically opposed to one another — the familiar unfriendly “either-or” rather than the more hospitable “both-and” conditions. The truth is that while “Value” and “Growth” offer an orderly way to organize the stock universe, investing through this binary lens may lead to missed opportunities to maximize risk-adjusted returns. Said differently, holdings within each style should not be viewed as mutually exclusive. After seven years of underperforming value from 2000-2006, and 17 years ago when growth reasserted itself, the pundits debated over how long a technology-led growth cycle might last. For long-term investors with multi-asset portfolios, a better question is: Does your portfolio have the right mix of value and growth – or is it time for a style makeover?

A Sector Story

It's important to note that style leadership characteristically rotates, and value cycles have typically lasted longer than growth, the most recent extended period of growth, notwithstanding. At their core, value and growth are often sectoral investments with growth being dominated by the higher-octane technology and consumer discretionary stocks while value tends to reflect the sleepier financials, industrials and materials.  This sector bet in disguise aligns perfectly with the nature of the periods of relative strength in each style; for example, the technology run-up in the late 1990s versus the commodity super cycle bull market before the GFC of 2008. The growth overweight in technology and underweight in financial services against its value counterpart are two of the most important factors of overall outperformance during the extended market trend. Logic then should dictate that a shift in style should accompany quite different relative sector performances.

Style Rotation or Diversification?

So how do we forecast style shifts? A key component of any investment process is economic/business cycle analysis. Here we assess stages of the business cycle and their impact on asset classes, sectors and industry performance. When thinking about the role of value and growth in the context of the economic cycle, investors may have the opportunity to position their portfolios to capitalize on its various stages. (see the “Four Phases of an Economic Cycle” graphic below).

Striking a Balance

The ability to accurately rotate between value and growth ahead of the market through an economic cycle, however, is exceedingly difficult. Because value and growth portfolios are driven by different factors, to solve for this we recommend blending these complementary styles to potentially smooth out returns, dampen volatility and remove that dreaded investor behavioral pitfall of market timing.  

So, about the peculiar turn of events in 2023 – enter the “Magnificent 7.” To the uninitiated, those are industry titans Amazon, Alphabet, Apple, Meta, Microsoft, NVIDIA and Tesla. In 2023, these giants formed the core of concentrated market leadership, comprising about 28% of the S&P 500 total weight but contributing about 93% of its total return. Their dominance defies traditional sector diversification strategies and raises questions about the sustainability of such concentrated market leadership.

Thankfully, the investment landscape is multi-dimensional. Growth and value stocks have displayed remarkable resilience in both rising and falling rate regimes. The focus on future growth prospects and a willingness among investors to tolerate higher valuations have positioned growth stocks as dynamic assets that can adapt and flourish, even when faced with headwinds such as rising interest rates. Comparably, the focus on intrinsic value and consistent dividend payments can make value stocks an attractive option for investors seeking stability and a reliable income stream, demonstrating their ability to adapt to various economic conditions.

 

The market performance witnessed in 2023 reminds us to approach 2024 with cautious optimism, recognizing that the market's gyrations may defy conventional wisdom. As investors navigate the complex terrain of declining interest rates, the key lies in striking a balance. Diversification remains the cornerstone of a sound investment strategy. A well-balanced portfolio that combines both value and growth stocks within the context of a broader portfolio can help mitigate risks and capitalize on opportunities across various market cycles.