Week 20 Day 3: The Rotation: Growth and Value Take Turns

Since 1927, growth has led in roughly 40% of years and value has led in roughly 60% of years. But they tend to lead in multi-year streaks, not single years. This makes it nearly impossible to time the switch. Owning a total market index (VTI) automatically holds both growth and value, ensuring you benefit from whichever is winning.

Historical rotation cycles: 1927-1940: Value leads (Great Depression punished speculative growth). 1940-1968: Growth leads (post-war economic expansion, Nifty Fifty). 1968-1982: Value leads (inflation era, energy and materials outperform). 1982-2000: Growth leads (tech revolution, dot-com boom). 2000-2007: Value leads (dot-com crash, financial stocks surge). 2007-2021: Growth leads (tech dominance, low interest rates, FAANG). 2022: Value leads (rate hikes crush growth stocks). 2023-2024: Growth leads again (AI boom, Magnificent Seven). The pattern: growth tends to lead during innovation booms and low-rate environments. Value tends to lead during high-inflation periods, rising rates, and recovery from growth bubbles. Since you cannot predict macro regimes reliably, the simple answer is: own the total market. A total market fund holds both growth and value at market weights, automatically adjusting as leadership shifts.

The rotation between growth and value styles is driven by fundamental macroeconomic factors. Asness, Friedman, Liew, and Pedersen (2000) documented the style rotation and linked it to bond yields, economic growth, and volatility. Cohen, Polk, and Vuolteenaho (2003) decomposed the value premium into a cash-flow component (value stocks have higher expected cash flow growth than their prices imply) and a discount-rate component (value stocks have higher expected returns due to higher risk). The discount-rate component explains most of the style rotation: when discount rates change (driven by monetary policy), growth and value stocks respond differently due to their different duration profiles. Notably, Asness et al. (2019) in 'Value Is Dead, Long Live Value' argued before value's 2021 resurgence that the growth/value spread was at a historical extreme and forecast mean reversion. This proved prescient. The implication for investors is that style timing, like market timing, is unreliable for most investors. However, systematic contrarian rebalancing (trimming whichever style has recently outperformed and adding to the underperformer) has historically added approximately 0.3-0.5% annually -- consistent with the mean-reversion in the value spread. This is most easily achieved by holding both styles and rebalancing, or simply using a total market fund.