Stock Market Rotation from Growth to Value Picks Up Steam

By: Wayne Duggan

Recently investors are witnessing a market trend that has been extremely rare over the past 15 years: Value stocks are outperforming growth stocks, triggering sell-offs in some of the hottest innovative tech names in the market.

The Big Rotation
For more than a decade, growth stocks have left value stocks in the dust. Since the beginning of 2005, the Vanguard Growth ETF (VUG) has generated a 523% total return. In that same period, the Vanguard Value ETF (VTV) has generated just a 292% total return.

So far in 2021, however, that trend has reversed decisively. Through May 11, the VUG growth ETF was up just 4.6%, while the VTV value ETF was up 17.4%. 

In the past 2 weeks, the divergence has accelerated. The VTV Value ETF is up 2.4%, while the VUG growth ETF is down 4.2%. The growth-heavy Nasdaq Composite is down 4.6%, while the value stock-heavy Dow Jones Industrial Average is up 1.3%.

Why It’s Happening
The biggest driver of the rotation from growth stocks to value stocks is fears over rising inflation. The Labor Department recently reported that the U.S. Consumer Price Index, a popular measure of inflation, was up 4.2% in April compared to the prior year, its biggest jump since 2008.

In a vacuum, 4.2% inflation isn’t necessarily a red flag given it’s comparing this year with pandemic levels in 2020. However, investors are growing increasingly concerned that the Federal Reserve will be forced to raise interest rates sooner than anticipated to cool off an overheating U.S. economy. In March, the Fed reassured investors that it will likely not need to raise interest rates through at least 2023. But the bond market is currently pricing in a 9% chance the Fed will be forced into at least one rate hike by the end of 2021, according to CME Group.

Rising interest rates mean a higher cost of capital for companies borrowing money to invest in growth. Higher interest rates are typically bad for the stock market as a whole, but they tend to hit unprofitable growth stocks much harder than profitable value stocks.

How to Play It
Traders looking to profit off the rotation to growth should identify traditional value stocks that have positive net income and relatively low price-to-earnings multiples and debt levels. 

Unfortunately, thanks to the recent surge in value stocks, that’s easier said than done. Many traditional value stocks (such as industrials, consumer staples and financials) find themselves with elevated price-to-earnings and price-to-sales ratios. 

At the very least, investors should consider taking some profits in the top-performing growth stocks in their portfolios.

Disclosure: The author holds no positions in the securities mentioned.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo or to open an account.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

The IPOX® Week, September 20th, 2021
Read More
Understanding the Basics of Option Pricing
Read More
4 Tips for Maximizing Trading Returns
Read More
The IPOX® Week, September 13th, 2021
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK