Relative Strength Investing Trends: Assessing the Growth vs. Value Dynamic

The trend of Growth outperforming Value has persisted for much longer than many would have anticipated and despite periodic rallies in Value, Growth continues to maintain the upper hand at this point.

What’s Hot…and Not

How different investments have done over the past 12 months, 6 months, and 1 month. Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world. Relative strength offers a disciplined framework for allocating among those trends. Markets are global and your portfolio should be too.  As of 9/21/20:

Past performance is not indicative of future results.

See disclosures in Appendix A, which includes the ETFs and Indexes used for this performance table. Performance numbers include dividends but do not include all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Fund Flows

Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute.

See disclosures in Appendix A.

Sector and Capitalization Performance

Past performance is not indicative of future results.

See disclosures in Appendix A.

High RS Diffusion Index

As of 9/21/20:

The 10-day moving average of this index is 44% and the one-day reading is 34%. Dips in this index have often provided good opportunities to add to relative strength strategies. 

See disclosures in Appendix A.

Relative Strength Spread

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 9/21/20:

After rising sharply in June and part of July of this year, the RS Spread has moved sideways in recent months as the RS leaders and the RS laggards have both had periods of short outperformance and underperformance.

See disclosures in Appendix A. 

Assessing the Growth vs. Value Dynamic

Before checking in on the relative strength relationship between Growth and Value, see below for the differences in sector exposure between these two investment styles. The largest sector weights in Growth are Technology, Consumer Discretionary, and Healthcare while the largest sector weights in Value are Financials, Healthcare, and Industrials.

Source: iShares, as of 9/21/20, Allocations are subject to change. Growth represented by iShares Russell 1000 Growth ETF (IWF). Value represented by iShares Russell 1000 Value ETF (IWD)

The following table shows the year-by-year returns of Growth (IWF) and Value (IWD) from the past 15+ years. 2020 has largely been a continuation of the outperformance of Growth that has been in place for the better part of that time frame. In some of those years, the difference in performance between Growth and Value was relatively small, but that difference in performance has been particularly wide in 2020 with Growth (IWF) +19.27% while Value (IWD) is -13.87%.

Source: Nasdaq Dorsey Wright, as of 9/21/20, price returns only, not inclusive of dividends

Another way to evaluate the relative strength of Growth and Value is with the following relative strength chart of Growth (IWF) vs. Value (IWD). As shown below, over the past 15+ years, this chart has had a series of higher highs and higher lows reflecting the favorable relative strength of Growth.

Relative Strength Chart: Growth (IWF) vs. Value (IWD)

Source: Nasdaq Dorsey Wright, as of 9/21/20, price returns only, not inclusive of dividends

The rationale for including both Growth and Value in a client’s asset allocation is largely driven by the desire for diversification. There have been stretches of time where Value has outperformed Growth—see 2000 to 2003 for just one example. Certainly, this trend of Growth outperforming Value has persisted for much longer than many would have anticipated and despite periodic rallies in Value, Growth continues to maintain the upper hand at this point.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset or strategy. In all securities trading there is a potential for loss as well as profit.   

Other Relative Strength Sources

• Brush, John S. "Eight Relative Strength Models Compared." Journal of Portfolio Management (1986).
• Berger, Israel, Moskowitz. "The Case for Momentum Investing." AQR Capital Management. 2009.
• Jegadeesh and Titman. "Returns to Buying Winners and Selling Losers." Journal of Finance (1993).
• O'Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.

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Nasdaq Dorsey Wright

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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