The value-to-growth ratio is often used as an indicator of relative strength but it may not have any predictive power. Main reasons for this failure are probably continuing technological innovation and funding of new ventures having decoupled from cost of capital.
Below is a ratio chart of iShares Russell 1000 Value ETF (IWD) and iShares Russell 1000 Growth ETF (IWF).
Some traders and investors have pointed to a “double bottom” formation that started mid 2020 and argue it was recently completed. In their opinion, there is a regime change and value will outperform growth going forward.
This may turn out to be true but the above ratio is uninformative. Charts of the ratio in financial blogs and social media start around 2017. However, before that, as it may be seen, this ratio made a double bottom on three occasions and in all three there was a throwback.
One reason growth may keep outperforming value is that there is continuing technological innovation and new players enter the game and attract attention from investment community.
Another reason that growth may continue to outperform is that despite expectations of rising interest rates, venture capital is no longer constrained because the returns from an IPO are orders of magnitude higher than cost of capital.
In addition, technology has already created their own money just in case funding gets too expensive: they are known as cryptocurrencies.
In general, I don’t like ratio charts because they suffer from all the pitfalls of charts when used to make predictions plus they imply some relation while ignoring conflating factors.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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