Monday, September 24, 2007

Why Aren't Stocks Forecasting Recession?

The Council on Foreign Relations notes that news stories increasingly are using the "R" word, contemplating a recession ahead. Indeed, a Google news search for "recession" turns up quite a few stories, mostly examining the Fed move in the light of averting a possible recession.

When we look at ETFs, however, the market itself seems to be telling a different story. Here are year-to-date returns, as of Friday, for various ETF pairs:

iShares Morningstar Large Cap Growth (JKE): +12.2%
iShares Morningstar Large Cap Value (JKF): +6.1%
iShares Morningstar Mid Cap Growth (JKH): +18.1%
iShares Morningstar Mid Cap Value (JKI): +0.3%
iShares Morningstar Small Cap Growth (JKK): +12.7%
iShares Morningstar Small Cap Value (JKL): -2.9%

iShares Russell 1000 Growth (IWF): +11.0% (-.79%)
iShares Russell 1000 Value (IWD): +4.8% (-2.83%)
iShares Russell 2000 Growth (IWO): +9.1% (-3.65%)
iShares Russell 2000 Value (IWN): -2.4% (-6.72%)
iShares Russell 3000 Growth (IWZ): 10.8% (-1.31%)
iShares Russell 3000 Value (IWW): 4.4% (-3.36%)
iShares Microcap Growth (IWP): 12.0% (-3.54%)
iShares Microcap Value (IWS): 3.5% (-6.55%)

Across every capitalization class, growth has beaten the pants off value year-to-date.

How about since the July market top? Have we shifted regimes away from growth?

The second set of percentage changes for the Russell indices shows the results from July 19th through today. Once again, growth has shown relative strength compared with value. If there is a regime shift, it is toward large caps overall and away from small caps. Perhaps that is because large caps, which on average are more likely to have international sales, can benefit from a weak dollar more than small caps.

In any event, the news and the pundits are saying one thing; the market something else.

If we are headed for recession, why are growth stocks consistently outperforming value?


A Shift in the Style Box

A Shift Across the Style Cube

A View From the Style Box


es-hmuz said...

I believe we are setting up for a crash - It may or may not be as bad as '87.

Reducing 50 basis points cannot wipe out all the troubles. It begs the question: Is it really Free Market?

Larry Nusbaum said...

I have no idea, other than this really may be different?
Prior to the last recession did we really see the dollar get crushed? Was globaization so pronounced? Was individual world wealth so widespread? In 2001/2002 India & China hadn't yet become so dominant and their demands for materials so blatant and pressing.
Isn't there more money and more liquidty than ever before? Searching for placement. And, haven't most investment advisors steered monies into large caps (growth) because it has lagged so many other sectors thus pushing up indices? Maybe this time is different......

Brett Steenbarger, Ph.D. said...

Hi Larry,

This time may be different. It's not uncommon to see large cap value hang on to the bitter end as bull markets age, as in 2001. As one astute reader noted, however, large cap value includes those beaten up financial shares. They might be the problem!