After underperforming in 2016, growth stocks have once again started to outperform value stocks in 2017. As the chart below illustrates, the S&P 500 Value Index consistently outperformed the S&P 500 Growth Index from 2002-2006. Since 2007, however, growth stocks have outperformed value stocks with value outperforming growth in just two calendar years (2012 and 2016) . It is clearly too early to tell if 2017 will end up being another year where growth outperforms value, but if it in fact ends up that way then lower bond yields are in play.
Over the past 15 years, US 30-year treasury yields have had a 76% correlation to the relative performance of value vs growth stocks. When value outperforms, it tends to be with a backdrop of higher bond yields. This is exactly the orientation we have seen since last summer. However, whenever growth outperforms value yields tend to fall. 30-year yields are off 17 bps (including the move today) since making a high on 12/16/16. During this period, growth has outperformed by over 2%.
When growth outperforms, we also tend to see lower inflation expectations. As the chart below illustrates, we have yet to see any meaningful backup in 10-year breakeven inflation expectations. In fact, inflation expectations are near multi-year highs. However, inflation expectations do come down meaningfully soon then this could indicate that growth will outperform in 2017.
Article by Eric Bush, CFA – Gavekal Capital Blog