by Thomas Alonso.
With the likelihood of the Fed beginning tapering in 2021 and rate hikes seemingly destined to follow in 2022, we decided to examine the performance of the value and growth indices relative to changes in 10-year yields. Using Datastream, we charted the performance of the indices and we saw that growth has materially outperformed value since the beginning of 2019 (Exhibit 1).
Exhibit 1: Russell 1000 Growth Index vs. Russell 1000 Value Index Performance Since 1/1/2019
Much of the outperformance of growth vs. value has been explained by the persistently low-rate environment. As the cash flows from growth stocks tend to be further out in the future, lower rates mean those cash flows are worth more when discounted to the present.
In Exhibit 2 below, the top panel shows the 1-month return of the Russell 1000 Growth (black line) and Value Indices (blue line) less the 1-month return for the Russell 1000, while the bottom panel shows the 1-month change in 10-year Treasury rates. When looking at the data for performance, it certainly seems that periods of value outperformance in the top chart align well with periods of rising 10-year rates in the bottom chart.
Exhibit 2: Russell Growth and Value Indices Relative Performance and 10-Year Rates
Further, we would note that the correlations between performance and the change in 10-year Treasuries seem to be getting stronger. In Exhibit 3 below, we chart the rolling 1-year correlation between the 1-month under/outperformance of the Russell 1000 Growth and Value Indices compared to the Russell 1000 against 1-month changes in 10-year rates. As shown below, the rolling 1-year correlation between changes in Treasury rates and growth/value relative performance are nearing peaks/troughs.
Exhibit 3: Rolling 1-year Correlation of Growth/Value Indices Relative Performance vs. 1-month Change in 10-year Treasury Rate
Source: Refinitiv Eikon
Using Datastream, we can compare the “dot plots” from two Fed meetings to see the changes. In Exhibit 4 below, we look at the change in dots from the last meeting in June 2021 to the most recent in September 2021. With the most recent Fed meeting implying a tapering of asset purchases likely starting in 2021, and the most recent dot plot showing rate increases now pulled into 2022, we could see value stocks begin to outperform.
Exhibit 4: Fed Dot Plot June and September 2021
This would be a repeat of what we saw at the beginning of 2021 when 10-year rates rose by ~40bps month-over-month and value outperformed by over 700 bps. (See the orange box in Exhibit 5 which shows YTD performance vs. 10-year Treasury rate changes.)
Exhibit 5: Russell Growth and Value Indices Relative Performance and 10-Year Rates
Refinitiv Datastream is a financial time series database that allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.
Refinitiv Eikon is a complete solution for research and analytics. It places the most comprehensive market information, news, analytics and trading tools available into a desktop.