Back From the Dead

Mike Zaccardi

JUST LIKE THAT, growth stocks are back in vogue. Vanguard Growth ETF (symbol: VUG) has outpaced Vanguard Value ETF (VTV) by more than nine percentage points over the past three weeks. That gap in favor of “risk-on,” meaning mainly technology shares, is the biggest since those two exchange-traded funds were created some 19 years ago.

What gives? Weren’t all the strategists proclaiming a new era of value investing? It still seems that way based on what you hear on financial TV and read in investment magazines. My hunch is that the growth comeback, perhaps driven by a 75% rally in Tesla (TSLA) shares from earlier this year, is a short-term trend.

Cast your mind back to the early 2000s bear market. Longtime investors might recall that rocky time. Making the downturn so grueling was not only its duration, but also its depth. The Nasdaq Composite peaked in March 2000, but it took until October 2002 to reach the market low, for a total decline of 78%. During those 31 months, there were several “bear market rallies.” Indeed, short-term snapbacks of 25% or more were common.

This month’s revenge of the tech titans shouldn’t be a big surprise. Many investment managers came into 2023 underweighted in once-sexy stocks like Apple, Amazon and Tesla. According to data from Strategas Research, 62% of active funds beat the S&P 500 in 2022—the highest rate since 2005 and after a dozen straight years of sub-50% readings—and that outperformance was made possible by underweighting big tech stocks.

Could 2023 be the year growth stocks find their footing again—and was 2022 an anomaly? We’ll have to wait to find out. But with the Nasdaq Composite stocks still trading at a pricey 26 times last year’s earnings, value shares appear cheap by contrast. That said, the winning investors so far in 2023 might be those who rebalanced their allocation at the end of last year—automatically trimming what worked (value) and buying what was lousy (growth).

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