Growth Stocks vs. Value Stocks: Where's the Smart Money?
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen with Anne-Marie Fertoli in New York. Is cheaper better? Well, maybe not when it comes to stocks in the current market. The valuations of growth companies, that is, companies that show rising earnings, are outpacing those of cheap so-called value stocks. And the separation between the two is catching many by surprise. Wall Street Journal reporter James McIntosh joins us from our London newsroom to discuss. So, James, the divergence between the two classes of stocks that you write about in your story in The Wall Street Journal, it's the widest it's been since just after the dot-com bubble. Does that mean that investors see the market that is hitting record after record as full steam ahead?
Well, it does certainly look that way. So, at the moment, the growth stocks in the U.S. are about 19 percentage points ahead of value stocks. So, The key question for me is, is this just froth? Is this investors getting way overexcited about all these records that the US is hitting and saying, well, what should I buy? Well, I should obviously go out and buy these big growth companies, the Amazons, the new dot-coms, shall we say, and people rushing out and buying those. And if that's all it is, then that's just froth. Or is it actually that it's different this time and that maybe, just maybe... The value stocks are the kind of old line companies that are being disrupted and they're dying and investors are correctly recognizing that, you know, who wants to own a shopping mall nowadays?
And if that's the case, then there's nothing to worry about.
James, some theories do suggest that a surge in growth stocks could mean investors see a market top on the horizon.
Well, it's not so much that they see a market top, I don't think, because if you were seeing a market top, then the last thing you'd want to own is the companies that are sort of most exposed in this sense. You'd want to be in very defensive, boring companies that are making their profits now rather than making their profits far in the future, because when you get market tops and the market starts going down, than companies whose profits are far in the future, which of course is for growth companies precisely what's going on with them. They're expected to grow their profits fast, so they're valued for stuff a long way out in the future. Those are the last things you want to own if the market's collapsing.
But some do classify what's going on here as an investor exuberance, and you oftentimes do see this kind of exuberance when a market top might be in the offing. Is that a fair assessment?
Yes. It's not that investors see this as that happening, but some people do. I mean, investors as a group clearly don't because otherwise they wouldn't be rushing out and buying them. So investors taken as a whole have absolutely been buying these growth stocks. So they clearly don't think that there's a market top coming.
How wide is the current divergence between growth and value stocks?
Now, if they're wrong, then I think it'll be very painful because if this is just froth and exuberance, then the expectation would be a sharp correction. which we've had a few times in recent years where we had a little bit, nothing like as exuberant as this, but we had in certain sectors things like this going on. So with biotech, for example, we had a very rapid run-up and then a very rapid drop-back briefly, and that can be very painful. You tend to get, after a very rapid run-up, if it turns out not to be sustainable, then the correction can be very painful for those within those sectors or in this case, within growth stocks.
James, I like how in your piece for the Wall Street Journal, you suggested that talking about this trend could get pretty meta. And certainly some of the experts did get meta, suggesting that looking at the value of value might be effective. Why isn't that completely an effective strategy?
Well, there's a fairly fierce debate with some nasty accusations thrown around between some of the quantitative managers who look at the value of value.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–3:02
2
How wide is the current divergence between growth and value stocks?
3:02–4:14
3
Are investors treating growth stocks as a sign the market is ‘full steam ahead’?
4:14–6:07
4
Could this growth-stock surge be froth or a durable structural shift?
6:07–9:30
Speakers
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