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By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research (GIR)
Among the more notable twists of this year’s raucous third quarter was the upending of the long-running underperformance of the US Growth indexes versus their Value counterparts.
As we cover in our latest GIR Russell US Indexes Spotlight report, both large- and small-cap Growth indexes held up better than their Value peers in the turbulent Q3 as the summer bounce-back in technology and other high-growth stocks did not fully unwind in the broad September selloff. In fact, Russell 2000 Growth even mustered a modest gain. Despite this recent reprieve, Russell 1000 Growth remained the worst performer among the Russell US index family YTD (though its small-cap peer was not far behind), and Russell 1000 Value still ranked at the top (down 17.8%).
Russell US index series performance (TR, USD %) – periods ended September 30, 2022
Source: FTSE Russell. Data as of September 30, 2022. Past performance is no guarantee to future results. Please see the end for important disclosures.
Fed policy and rates call the shots
This recent Growth/Value tug of war has coincided with the big shifts in inflation and interest-rate expectations since the spring. Both large- and small-cap Growth enjoyed a strong comeback in early months of the quarter, when the sharp deterioration in leading economic indicators raised hopes for an earlier end to Fed rate hikes and triggered a sharp drop in US bond yields. But those hopes and the rebound in growth stocks came to an abrupt halt in the September rout after Fed Chair Jerome Powell’s hardline speech at the annual Jackson Hole symposium in late August, and increasingly hawkish Fed messaging, drove a renewed spike in bond yields.
10-yr US Treasury bond yield (%)
Source: FTSE Russell/Refinitiv. Data through September 30, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
So, while the Growth style indexes have retraced much of the ground lost to Value since March, they continued to badly lag for the year, as illustrated below.
Russell US Growth relative to US Value index returns (rebased)
Source: FTSE Russell. Data through September 30, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Resource and defensive stocks led the way
Growth’s Q3 winning streak came amid nearly universal losses across industry groups. Across all four style indexes, rate-sensitive Real Estate, Tech, Staples and Telecom stocks were the worst performers, while Energy was the only sector to post gains.
Russell 1000 Growth fared better than Value in eight of 11 industries in Q3, buoyed mostly by outperformances in large-cap Utilities, Discretionary, Basic Materials and Energy. Russell 2000 Growth did so in nine of 11 industries, led by small-cap Telecom, Discretionary and Health Care stocks.
Industry returns (TR %) – Three-months ended September 30, 2022
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data as of September 30, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Despite this U-turn, Value held its edge over Growth YTD for both the large- and small-cap indexes in most industries (eight of 11). Telecom, Health Care and Energy were the top Russell 1000 Value performers for the period, while Energy, Utilities and Real Estate buoyed Russell 2000 Value returns.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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