A Look at Value
2017 in the stock market so far has proven to be another stable year, returns in the S&P 500 have hovered around double digits, and we have hit all-time highs. As we start to peel back what is happening, there is a trend that has taken shape that is worth noting. There is a growing divergence between growth companies and value companies and their current valuations.
We have mentioned before, the markets on average seem to be fairly valued and possibly even expensive. This can go on for much longer and much higher but it does represent a risk. An interesting observation is that this is not universally true within the S&P 500. For a few years now we have seen expensive companies grow even more expensive over time (in regards to PE) while many of the value companies have only grown as fast as their earnings have grown. This widening gap between growth and value is reaching a point that was last seen during the dot-com bubble.
While relative value is a poor short-term timing instrument, it does help put historical events in context. Eventually, when the markets corrected after the dot-com burst, value outperformed for nearly a decade as valuations normalized and cash flow was valued over potential growth. As we march further and further into the later stages of this market cycle, our preference remains to pursue "cheap" valuations and to make sure not to overextend chasing valuations.