The outperformance of growth stocks over value stocks since the Great Recession1 has been widely discussed, and many investors are questioning if it is now value’s turn to finally re-take leadership. Fuel has been added to this fire with the recent positive news flow for COVID-19 vaccines, which would support the eventual return to normalcy and economic recovery.
We agree that some of the more economically sensitive value stocks should be some of the key beneficiaries during the early stages of an economic recovery, based on what we’ve seen through history. However, we also believe that this is as good an environment as we’ve ever seen for equities in general — one that is favorable for broad participation for both value and growth stocks (Figure 1).
To us, the question isn’t “growth vs. value.” Rather, it’s “all other asset classes vs. equites.” In our opinion, the verdict for equities is quite clear for three reasons:
- With positive vaccine news, COVID-19 risks are decreasing, which is supportive for risk assets such as equities.
- With the election outcome (largely) settled, election uncertainty risk is now mostly behind us.
- The Federal Reserve is the most dovish in history and has noted they will keep that posture for the foreseeable future.
It’s been noted that the current bull market for US equities is the most unloved on record, based on flows into fixed income versus stocks. Why? Many investors never fully recovered from the scars of 2008, and instead of embracing stocks’ structural advantages, they favored fixed income investments and/or hoarded cash. In some cases, investors are accepting negative real returns as an alternative to owning equities. Twelve years into the stock market’s post-2008 recovery, we don’t think it’s too late to participate by owning either growth or value stocks as we prepare to enter 2021.
Figure 1: Both growth and value stocks have performed well in the second half of 2020
How we are positioning Invesco Discovery Mid Cap Growth Fund2
Given our view that we are in the early stages of an economic recovery driven by vaccine developments, we have added exposure to some of the more economically sensitive areas of the market. Some examples include semiconductors, machinery, trucking, building products and homebuilding.
However, while we anticipate that growth may lag value for some (likely shorter) time period, we do not believe a regime change has begun with an extended period of value leadership on the horizon. At the end of the day, the secular tailwinds for growth remain intact including the technological transformation across industries, below-trend economic growth, and a Federal Reserve committed to keeping rates near zero. Therefore, our focus remains on companies with the potential to have sustainable, above-average growth rates.
We also believe the mid-cap growth segment of the market is one of the ripest, if not best, areas to find those opportunities, whether it be companies leading the digital revolution, providing innovative therapeutic or diagnostic solutions, or a wide array of other disruptive innovations.
While we can’t predict whether value or growth will lead on any given day and for what length of time, we feel the setup is favorable for both as we look forward to a new year and see few better alternatives.
1 Source: FactSet Research Systems. Based on index performance from Jan. 1, 2009, through Nov. 30, 2020. Annualized returns for the Russell 1000 Growth Index were 18.41%, compared to the Russell 1000 Value Index at 11.39%.
2 Effective Sept. 30, 2020, Invesco Oppenheimer Discovery Mid Cap Growth Fund was renamed Invesco Discovery Mid Cap Growth Fund
Blog header image: Jimena Roquero / Stocksy
All investing involves risk, including the risk of loss.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
The Russell 1000® Growth Index is an unmanaged index considered representative of large-cap growth stocks. The Russell 1000 Growth Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The Russell 1000® Value Index is an unmanaged index considered representative of large-cap value stocks. The Russell 1000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The Russell Midcap® Growth Index is an unmanaged index considered representative of mid-cap growth stocks. The Russell Midcap Growth Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The Russell Midcap® Value Index is an unmanaged index considered representative of mid-cap value stocks. The Russell Midcap Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The Russell 2000® Growth Index is an unmanaged index considered representative of small-cap growth stocks. The Russell 2000 Growth Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The Russell 2000® Value Index is an unmanaged index considered representative of small-cap value stocks. The Russell 2000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
The opinions referenced above are those of the author as of Dec. 9, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.