A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

November 23, 2015

Value stocks: 7 year switch?
Ratio of S&P 500 Value Index to S&P 500 Growth Index


Source: Bloomberg, as of 10/31/15. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Growth stocks have outperformed value stocks for the past 7 years, but some believe the trend could reverse in the years ahead.
  • While past performance is no guarantee of future results, recent history provides useful insight into why optimism about value stocks may be merited.
  • For starters, the performance gap has grown quite wide—the ratio of the S&P 500 Value Index to the S&P 500 Growth Index is the lowest since 2000. That could be viewed as an extreme—and extremes typically don’t go on forever.
  • Note that in 2000 the performance gap was extremely wide, because the technology bubble had driven valuations of growth stocks much higher relative to value stocks. When the tech sector corrected, that performance differential reversed quickly.
  • Fast forward a few years to the period when value stocks outperformed growth stocks (2004-2008).
  • The Federal Reserve (Fed) was tightening interest rate policy during that period: the fed funds target rate rose slowly but steadily, from 1% to 5.25% from June 2004 through August 2007.
  • That could well be an important precedent for investors to consider now—because the ultralow interest rate environment that's prevailed for several years is thought by many to be a key driver behind the extended outperformance of many growth stocks.
  • The assumption is zero rates may enable highly leveraged growth businesses to easily keep borrowing without the level of investor scrutiny one would expect if the cost of borrowing were to be higher.
  • With that in mind, as the Fed begins to normalize interest rate policy, it's arguable that relative performance may turn in favor of value stocks.

The chart:

  • The chart shows the ratio on the S&P 500 Value Index to the S&P 500 Growth Index-the value is calculated by dividing the index price of the value index by that of the growth index.
  • When the line is above 1, the value index is outperforming the growth index and when the line is below 1 the growth index is outperforming the value index.


The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The S&P 500 Value Index is an unmanaged capitalization-weighted index of large-cap stocks chosen for their value orientation."

The S&P 500 Growth Index is an index of stocks representing approximately half of the market capitalization of the stocks in the S&P 500 index that, on a growth-value spectrum, have been identified as falling either wholly or partially within the growth half of the spectrum based on a number of factors.

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Will China's official growth rate fall to 6 percent by the end of 2015?


Will China's official growth rate fall to 6 percent by the end of 2015?

Yes: Economic reform measures will take their toll on growth
Yes: Demographics and urban labor shortage will constrain demand
No: New monetary and fiscal stimulus will restore rapid growth
No: Recovery in the US, Europe and Japan will more than make up for slowing domestic demand

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When will the Fed raise the Fed Funds target rate?

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