Can Growth Continue To Dominate?

Chart of the Week for June 30-July 6, 2000

The past can’t predict the future, but it can help us understand patterns of performance in the markets. The chart above shows the performance of growth stocks relative to value stocks (the “growth premium”) since 1975, when the growth and value indexes began.

As you can see, sometimes the growth premium is positive, and other times it’s negative. About two-thirds of the time, the premium stays in a range of +/- 8% relative to value (between the gold lines). That’s one standard deviation from the average premium of close to zero. Only rarely—less than 5% of the time—does growth performance deviate from value performance by two standard deviations (marked by the red lines). When it has happened, the performance pendulum has swung back fairly strongly to favor the other style. True extremes have not typically persisted for long periods.

Except recently. Growth pulled back a bit relative to value, but then rocketed back up outside the red line marking two standard deviations. This is an unexpected event, statistically speaking. Although we can’t use statistics to forecast, it doesn’t make sense to ignore historical relationships completely. Including both growth and value styles in a portfolio makes sense.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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