Historic Market News: 11/19/2018Submitted by Executive Wealth Management on November 20th, 2018
Paying "up for growth” is something that we have heard quite a bit in the past few years. Put simply, it means that an investor must pay more for each unit of earnings or revenue in a high growth company compared to an established mature company. That so many investors have been willing to do this has been a reflection of the market’s quest for growth. However, the recent market turbulence has taken some luster off of the growth stories and brought to light the other side of that equation. When you pay up for growth and the growth appears to be fading, the stock price can drop rather fast.
The chart above describes the phenomenon that we have seen over the last two years. A relatively stable difference in the forward price/earnings (P/E) multiple for the next twelve months (NTM) between growth and value stocks increased dramatically starting in late 2016 based on a narrative of growth in the economy. The recent market weakness has diminished this difference. We do not know if the growth love affair is over, but it is taking a pause. This has caused the price of growth companies and indexes to fall further and not rebound as fast as the value indexes, as indicated in the chart below.
If a growth narrative returns to the market, then the recent P/E norm may continue. If growth does not return to the market, then it could be a different story and value stocks could return to dominance.