Dave Hutchison, CERTIFIED FINANCIAL PLANNERTM 1720 E Calle Santa Cruz HUTCHISON INVESTMENT ADVISORS E-mail: [email protected] Phoenix Arizona 85022 Registered Investment Advisor website: www.HutchisonRIA.com Founded on a CPA Firm Background Fax (602) 955-1458 (602) 955-7500 Value vs. Growth Stock Outlook & Action Plan Over the last few years the strong momentum has been with growth stocks vs. value, which has limited the gains for value stocks while growth stocks have soared. Growth stocks are usually associated with high-quality, successful companies whose earnings are expected to continue growing at an above-average rate. Growth stocks generally have higher valuation ratios to reflect their high growth relative to the market. The market often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having greater worth and may be willing to pay more to own shares. At times, growth stocks may be seen as expensive and overvalued, which is why some investors may prefer value stocks, which are considered undervalued by the market. By many measures, value stocks are lagging growth stocks by almost as much as they ever have in the past several decades. Usually at such extremes, value stocks enter a sustained phase of outperforming growth stocks.. However, the momentum currently is with growth stocks and it is unclear when that may change. Many value stocks are in the financial sectors, including banks and asset managers. In addition, retailers and fossil fuel companies tend to have low valuations, however there may be more permanent shifts on their outlook that may justify their lower valuations. Value stocks tend to be higher dividend stocks, which have some interest rate risk if their dividends cannot increase with higher interest rates. Banks benefit from higher interest rates and a steeper yield curve - so they can lend at higher long- term rates vs. their cost of money from savings accounts, money markets and short-term rates that they often borrow at – including from the Federal Reserve. Market analyst Callum Thomas 1/20/2020 good summary: The investment strategy graveyard is littered with failed calls for a turnaround in the performance of value vs growth stocks. But I think we could be close to the much-awaited and much-forecast turning point. Relative value between the two cohorts is at the lowest point in 20 years, and in terms of macro catalysts, my expectations for higher bond yields, better growth, and higher commodity prices will help the sectors that are slightly over-represented in value vs growth. So, don’t forget about value. Dave comments: However, with $17 trillion of negative bond yields globally, with U.S. growth slowing to only around 2% or less, we may not be at a favorable time for value stocks yet. BEN CARLSON, CFA - A Wealth of Common Sense blog highlights January 2020: Value stocks After the [late 1990’s] dotcom bubble deflated after, value stocks—stocks that are cheap relative to the value of their underlying businesses—went on a run of huge outperformance over growth stocks. But growth has beaten the pants off value since the financial crisis, led by high-growth companies such Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser. Additional Investment advisory services offered through Hutchison Investment Advisors, a Registered Investment Adviser. Cetera is under separate ownership from any other named entity. as Amazon, Netflix, Google, and Facebook that have monopolized investor mindshare. The growing economic impact of tech innovation, particularly in software; the rising value of intangible assets like patents, copyrights, and trademarks; and the willingness of investors to pay extra for growth in a world awash in capital have all contributed to growth’s edge. Still, investors think a turning point could be near. Using several metrics, growth stocks are more expensive now than at any time except during the dotcom bubble. In contrast, excluding the tech bubble, the value of value stocks is the cheapest it’s ever been. Of course, just because something is cheap doesn’t mean it can’t get cheaper. As our examples show, each of these categories has a black eye for a reason. That’s what makes the current situation for investors so confusing: It can seem like your only choices are to invest in assets with good fundamentals but high prices or to invest in assets with deteriorating fundamentals but low prices. Yes, history tells us that economic cycles will eventually boost energy and metals stocks and value stocks again, but it won’t tell us when. Diversification means always having to say you’re sorry The main reason to diversify is to avoid concentrating your money in a terrible-performing asset for an extended period. But spreading your bets also means that at least part of your portfolio will be sucking wind while the rest of it sprints ahead. You’re accepting the occasional strikeout to increase your odds of winning the game. Action Plan Recommendations I can discuss individually specific recommendations based on goals, objectives, and risk tolerance. In general, I suggest investors have a diversified portfolio to include both value and growth managers with long-term track records of outperformance compared to the category they invest in and compared to the risk taken (Alpha vs. Beta in investment terms) – not just raw returns. While U.S. growth is slowing, the U.S. has comparatively stronger economics than most global economies. U.S. Small-Mid Caps often have the potential for faster growth, and with so many more smaller companies than large, good research can potentially find hidden gems. Smaller companies’ stocks are often more volatile with less trading volume, but over the long term have rewarded investors. I avoid “dumb” index funds with no stock selection based on individual company outlooks, or similar ETF’s (only make sense for traders, not investors). For those seeking income or for the more conservative allocation in a diversified portfolio, I suggest various bond alternatives, without the interest rate risk of many bonds at this point in the economic cycle. Part of our "participate-yet-protect" strategy in a growth-oriented portfolio is to have alternative investments so that in a significant equity market decline when you also need cash, you do not have to lock in large losses in a market downturn. Markets have always returned to new highs - only the timing is uncertain. Remember that math works against you in a market decline: for example, if the market has a 20% loss, it require a 25% subsequent gain just to break even. Required Disclosures: The S&P 500 is an index of 505 stocks chosen for market size, liquidity and industry grouping (among other factors), designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Past performance does not assure future results. There is no assurance that objectives will be met. Investments in securities do not offer a fixed rate of return. Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investments that emphasize smaller companies may experience greater price volatility. The views and opinions expressed are as of the date of the report and are subject to change at any time based on market or other conditions. The material contained herein is for informational purposes only and should not be construed as investment advice, since recommendations will vary based on the client's goals and objectives. Information is believed to be from reliable sources; however, no representation is made as to its accuracy. Hutchison Investment Advisors, Inc. is an Arizona registered investment advisor. Part II of Form ADV (Disclosure Statement) has been given to advisory clients and is available upon request, and is also at http://dhutch.news/RIADisclosure .