Market Insights: The Big Growth to Value Shift

Milestone Wealth Management Ltd. - Mar 19, 2021

Macroeconomic and Market Developments:

  • Equity markets in North America were flat to lower this week. In Canada, the S&P/TSX Composite Index was up 0.02%. In the US, the Dow Jones Industrial Average was down 0.45% and the S&P 500 was down 0.76%.
  • The Canadian dollar down slightly this week, closing at 80.0 cents from 80.2 cents last Friday.
  • Oil prices were sharply lower this week, with US WTI oil finishing at $61.35 from $65.60 last week. The Canadian WCS oil price finished at ~$49.50 from ~$55.00 last week.
  • Gold prices were up this week, finishing at ~$1,744 from ~$1,723 last Friday.
  • Last weekend, S&P Dow Jones Indices announced changes to the makeup of the S&P/TSX Composite Index in Canada. They will be removing Lundin Gold and adding AcuityAds, Canaccord Genuity, Denison Mines, Dye & Durham, Endeavour Silver, Goeasy, Lithium Americas, NexGen Energy, OrganiGram, SunOpta, Turquoise Hill, Village Farms and Westport Fuel Systems.
  • On Monday, Rogers (RCI.b) announced that it will be buying Calgary-based Shaw Communications (SJR.b) for C$40.50/share, representing a premium of ~70% to Shaw’s trading price. The purchase will be in cash, with the exception of the Shaw family, which owns ~60% of the outstanding shares, and will receive shares of Rogers. However, the deal still has to clear regulatory approval in Canada.
  • Also, on Monday, Canaccord Genuity Corp announced their intention to offer $2.30/share for RF Capital Group, formerly known as GMP Securities. Canaccord disclosed that they sent a letter to the board on March 9th, however, the offer was rejected without providing a reason. Now Canaccord is taking the offer directly to shareholders.
  • Statistics Canada reported that the Consumer Price Index (CPI) for February rose 0.5% month-over-month vs consensus estimates of +0.7%. Year-over-year, the CPI gained 1.1%, faster than January's 1.0% pace. Excluding gasoline, which can be volatile, CPI rose 1.0% in February, down from 1.3% in January. Also, Statistics Canada reported retail sales declined 1.1% to $52.5B in January; less than consensus and the agency's own flash estimate for a 3.3% drop. And finally, Statistics Canada published February New Home Price Index which gained 1.9%, showing new home prices rose at their fastest pace since Feb-1989.
  • The US Federal Reserve met this week. Their post-meeting statement kept their inflation rate expectations below 2%; however, the central back did increase its forecast for economic growth, raising its forecast for real (above inflation) GDP growth this year to 6.5% versus a prior forecast of 4.2%. This was largely the result of the recently-enacted $1.9 trillion stimulus plan. In turn, higher real GDP translates into lower unemployment rate projections, including 4.5% at the end of 2021 (was 5.0%), 3.9% at the end of 2022 (was 4.2%), and 3.5% at the end of 2023 (was 3.7%).
    Total global cases of COVID-19 finished this week at 122.1 million, with the total deaths at 2.70 million. In Canada, total cases now stand at 922,848, with active cases at 29,280. In Alberta, total cases are 140,127, with active cases of 5,084.
  • For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER

Charts of the Week:

In two of the last three weekly commentaries, we discussed rising long-term interest rates and the steepening of the yield curve. Today, we wanted to highlight how this has affected stock markets of the last few months. Looking back at nearly year ago today, the S&P 500 Index has gained an incredible 75% since the bottom of the COVID crash low on March 23rd, 2020. This upcoming Tuesday will mark the one-year anniversary of that date. Something interesting happened about halfway through in early September, where the leadership of the market shifted away from ‘growth’ stocks to ‘value’ stocks and from large market capitalization to small. This was a shift we picked up on early, and we actually commented on this in back-to-back weeks in our weekly commentaries of September 11th and September 18th. Looking back now, this is around the time when the “Big Shift” began on September 2nd. It marked an important turning point where the growth trade peaked, relative to value (orange line), and larger stocks took the backseat to smaller stocks; a trend that had been in place for quite some time before COVID. You will see this turning point in the following two charts. After outperforming for years, growth has been underperforming in a big way since that date. The second chart shows the S&P 500 Index (blue line) which is market-weighted vs. the equal-weighted version (orange line). The former’s performance is dominated by the largest market capitalization stocks, whereas in the equal-weight version all 500 stocks contribute the same amount. You will see that it, too, peaked on the same day, September 2nd. Since September, the market (blue line) has continued to push to new highs, it is just that the leadership changed from growth to value and to smaller market cap equities, away from large cap.

                         Source: Bespoke Investment Group

Here is another way of illustrating this difference; by looking at the percentage change of the S&P 500 market-cap weighted index vs. the average S&P 500 stock from the crash bottom of March 23rd to September 2nd, and then from that point on through Tuesday of this week. Since the “Big Shift” date, the average stock is ahead by approximately 15%, or almost 2.5X the rise of the market-cap index. The means that the largest stocks (Apple, Amazon, Microsoft, etc.), which had been pushing the market higher previously, have been lagging the smaller stocks significantly of late. This changing of the guard generally favors active management over passive.

                        Source: Bespoke Investment Group

Did anything specific cause this big underlying shift to occur? Looking through everything, there is nothing that stands out on the headlines front at that point in time. However, we strongly suspect it has to do with the rise in long-term interest rates; it just so happens that, in hindsight, the market had already foreseen this situation. As we have discussed, the stock market itself is a strong leading indicator. If you look at the following chart of the US 10-year Treasury yield, you will see the red dot is September 2nd. It didn’t start to breakout to the upside until late October or about six weeks after this date, and we would argue that the biggest breakout didn’t occur until just recently, in January, when the rate finally pushed back above 1% on January 6th.

                      Source: Bespoke Investment Group

Another way of looking at the growth to value leadership change since September is to look at the price-to-sales (P/S) ratio of the S&P 500’s components. If you break up the S&P 500 into deciles from the lower P/S ratio to the highest, you can see just how strong the returns have been on the lowest P/S stocks. So, while growth in general has trounced value over the past five years leading up to September 2nd, the script has been totally flipped since then.

                                Source: Bespoke Investment Group

This rise in interest rates has really taken its toll on the prices of long-term bonds. Recall that the price of a bond is inversely related to interest rates, so in general, as rates rise, the price of the bond you own goes down, and the longer the maturity and the lower the coupon, the more sensitive it is to those moves. As highlighted in the next two charts, the exchanged-traded fund ‘TLT’, which represents the US 20+ Year Treasury Bond Index, is now in a bear market (decline of 20% or more from a peak) and down 15% including interest on a year-to-date basis. What many consider to be ‘safety’, long-term government bonds have had a very rough ride of late. As we stated in our comments about interest rates over the last few weeks, we shifted the fixed income composition of our own mandates quite some time ago in anticipation of this interest rate rise, and thus it has been performing well on a relative basis to the broad bond benchmark so far this year.

Source: Bespoke Investment Group

Sources:, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University,, Canaccord Genuity, Tony Dwyer, Bespoke Investment Group


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