With the Russell rebalancing coming up, it’s time to take a look at those constructs of “growth” and “value.” The chart above concentrates on the total returns for the large cap varieties of each, at least according to the Russell methodology.
You can see the overall shape of the returns is reflective of the last posting (on Cisco and Sysco). The two categories of stocks marched together for awhile, then growth soared for a time before plunging, all the while value was mostly going sideways until everything dropped in 2002 before recovering. The financial crisis featured pain for both, but value was particularly hard hit.
What’s interesting is how little variation there has been in the returns on growth and value of late. And the trailing correlations between the two are seemingly locked at an extremely high level.
There are a variety of issues to look at here, starting with our need to categorize and the consequences stemming from where we draw the lines. Then there are the questions of style purity and whether Russell’s approach really maps the concepts as well as it could. Plus, we’ve been in a “risk-on, risk-off” situation of late in terms of the market’s reaction to macro events. There could also be market structure issues at work — perhaps algorithms care less about these concepts than people do.
More musings on growth and value will come in a future essay on the research puzzle. For now, what is your bet as to what you see? Will the pattern break any time soon, as it did in 1998? Which style will win? Why? (Chart: Bloomberg terminal.)