What does 2018 hold for the market? Anne discusses this in more detail on page 4 but the consensus probably is for MOTS – “More of The Same.” Growth in the Global Economy and higher corporate profits should lead to higher stock prices. Caveat Emptor however, this is the perceived wisdom and we all know the danger of trying to predict the future!
Since the lows in the winter of 2009, Growth stocks have outperformed Value. Growth stocks are shares of faster growing companies which are perceived to have a very secure and predictable future. Value stocks are shares in companies that have stubbed their toes and where the stock price is down.
It is very common for Growth to outperform for a period of time and then for Value to rebound. We think we are in for a switch this year. Growth has grown more expensive relative to Value and a lot of future growth has been discounted. JP Morgan estimates that large cap Growth stocks are trading at 21x their earnings versus 16x for Value stocks. Small cap Growth stocks are trading at 33x their earnings compared to 18x for Value. As investors look for the best risk-return trade off we think Value will attract more attention.
In 2000 when high priced tech stocks were hitting their highs, Value ideas were very much out of favor. Over the next two years tech stocks fell precipitously while Value stocks drifted sideways. We do not think tech stocks are as overpriced today as they were in 2000 but a similar swing from one group to the other may play out in 2018.
Now obviously this is a prediction and not a certainty. As the title of this page notes, sticking with a trend is often the most profitable way to go – except at the major turning points. Value investing has always worked out and over longer periods has been more profitable than Growth. We think we are in the early stages of a shift now.