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Growth vs Value Investing in 2024 with Brad Kasper

January 22, 2024

Growth vs Value Investing in 2024 with Brad Kasper

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Growth vs Value Investing in 2024 Show Notes

Back for his eighth appearance on The Guided Retirement Show, LSA Portfolio Analytics President and Founder Brad Kasper joins Dean Barber to discuss growth vs value investing in 2024. Brad shares that value could potentially outperform growth as we look at investing for the rest of the year. Why might he think that? Brad has plenty of data to share with Dean to back up his reasoning.

In this podcast interview, you’ll learn:

  • Dean and Brad’s Assessment of the Markets for 2023 and Predictions for 2024
  • Attractive Opportunities in the Bond Market
  • The S&P 500 Equal-Weight Outperformed the S&P 500 Cap-Weight in 2023
  • Growth vs Value Investing Over Different Time Periods

Recapping What Happened in the Markets in 2023

Brad always jumps at the chance to talk about monetary policy, so he was thrilled to join Dean again to discuss growth vs value investing in 2024. But before they share their thoughts on growth vs value investing in 2024, they’re going to set the stage by recapping what happened in the markets in 2023.

What’s the Latest with Interest Rates?

At the beginning of 2023, many believed that the Fed was going to be done raising rates and beginning to start cutting rates. Half of that proved to be true, as the last hike came in July. Brad thought some of the optimism surrounding rate cutting was a bit premature, but the Fed has indicated that there could be at least three rate cuts in 2024.

“I think the second half of 2024 is the earliest that the Fed will start to cut rates unless there is a catalyst that starts to change some of that.” – Brad Kasper

As the Fed continued to raise rates for the first half of 2023, bonds were under pressure for most of the year. But once the Fed started to soften its tone in the fourth quarter, equity markets picked back up and bonds began to rotate. At one point, the 10-year treasury was around 5%, but it ended the year closer to 4%.

“That’s a significant move on bonds, which suddenly gave a little bit of credence to the Barclays U.S. Bond Aggregate. Everyone that has been wildly upset at their bond behavior and performance saw incredible bond performance in a short window.” – Brad Kasper

As Brad and Dean ponder what will transpire in 2024, they see some reasons to be optimistic about certain asset classes. They’re going to explore what opportunities might be out there for investors.

Breaking Down the Bond Market in 2023

Let’s review how the bond market performed in 2023 and then work our way toward revealing some of those potential opportunities. As Brad mentioned, there were some wild swings in the bond market, with the 10-year treasury beginning 2023 around 4%, touching 5% on October 18, and finishing the year just under 4%. The bond aggregate was in negative territory until October 18, but ended the year up about 5.5%.

An Opportunity in Municipal Bonds

Dean was also fascinated by what occurred in the municipal bond market last year. For people that have taxable accounts and are looking for tax-free interest/income, there was something that happened in 2023 that we haven’t seen in 20-plus years. You can buy high-quality, AA+ municipal bonds at or below par value.

“We haven’t seen that in so long. If you go back to the beginning of 2021, those high-quality municipals were trading at 10%, 15%, to 20% premiums depending on the duration.” – Dean Barber

That’s just one example of an opportunity that’s come to light in the broader bond market. During the first six weeks or so of 2023, bonds were taking off. There were people who thought they had missed the opportunity to get into bonds since this was on the heels of one of the worst years ever in bonds (2022). Suddenly, the fundamentals in the fixed income markets looked more attractive again.

“That’s Pretty Darn Attractive”

But after those first few weeks of 2023, there were other factors that needed to be considered first. Inflation still wasn’t fully under control and the Fed wasn’t quite done raising rates. There was still some pressure that the markets had to contend with. As we went through that, we found the 10-year around 5%.

Brad finds it interesting that over the past two decades, here’s heard several people say how they miss the days where they can get 4.5%-5% on a seven-to 10-year bond. Well, guess what? We reached those types of levels, and it came at a discounted price.

“When looking at the discounted rate that I’m buying the bond at, if I hold it to maturity, what am I getting paid over that time? We were finding yield-to-worst profiles in the intermediate core that ranged between 6% and 7%. That’s pretty darn attractive.” – Brad Kasper

What’s Next for the 10-Year?

Dean thinks there will continue to be opportunity in bonds. He thought that the bond market overreacted to the Fed and the yield on the 10-year came down too fast.

“I think we’re going to see a gradual increase on the 10-year over the next several months. At the end of the year, I think we’ll wind up at about the same place we started, but I don’t think it’s going to be continued decline.” – Dean Barber

So, what does that mean for fixed income investors? It means that the yield is likely what your return is going to be in 2024.

Coupon Plus or Coupon Minus?

Brad sees bonds through the lens of coupon plus or minus. The coupon is what you’re getting paid to hold the bond. The plus or minus is pricing action on the bond markets throughout the course of the year. In 2024, Brad agrees with Dean and thinks we’re in a coupon plus one or two type of market environment.

“Overall, I think it’s a coupon environment. And now that coupons are elevated a little bit, that’s pretty darn attractive. It hasn’t been that way for quite some time.” – Brad Kasper

Last year, all the action was in the money markets. People were wondering why they were in a five-to seven-year bond when they could get a money market that was paying as much, if not better. The problem with that is that it’s daily and the rate can change daily. In that case, do you want to lock in that return for a longer period or potential go into a declining interest rate environment in 2024 where the rates could come back down?

Yield Curve Inversion

When the 10-year treasury hit that high of 5% on October 18, the three-month treasury was at 5.6%. The inversion of the yield curve had flattened a little bit. But at the end of the year, the three-month was still at 5.4% while the 10-year fell below 4%.

Brad still thinks we’re going to see the yield curve start to flatten out, but it’s not going to happen immediately. It’s important to remember that the overnight lending rate anchors the short end of the yield curve. So, every time you hear an update from Jerome Powell and the Fed, they’re driving the action on the overnight lending rate.

“At some point, (the overnight lending rate) has to come down. I’m not in the camp that it has to happen early because I don’t think we’re seeing reduction in inflation at a pace that’s quick enough that’s going to give Powell and the Fed confidence that they need to start lowering rates earlier.” – Brad Kasper

A Recession in 2024?

Therefore, Brad believes the yield curve will remain inverted for a bit longer. While people don’t like to hear it, it’s important to remember that inverted yield curves have long been one of the strongest indicators of recessions. Brad argues that we still haven’t had a full recession, so he foresees that there will be a lot of dialogue about what a recession could look like in 2024.

“I don’t think the depth and duration of the recession are as concerning as some of the cycles of the past … But I think we need to be somewhat realistic that the indicators still suggest that are concerns of some type of recession in 2024.” – Brad Kasper

The Fed went from being very hawkish to having a dovish tone. When the Fed gets more of a dovish tone, the markets must realize that there is a slowdown that’s happening within the overall economy. It’s what’s called a Goldilocks environment. You don’t go from a strong growth market to a recession overnight unless there’s a catalyst like a global shutdown. There are usually some steps that need to happen in between.

In the early parts of 2024, Brad thinks we’ll see the slowdown play out. That leads him to believe that we could see a recession in the second half of the year. However, he doesn’t think it will be long-lived.

It’s Not What You Make; It’s What You Keep

There’s a saying from Dean that Brad really likes and thinks is very fitting right now—it’s not what you make; it’s what you keep through full market cycles. We just had some very strong market performances in Q4 2023. How much of that are you going to be able to keep over the next six to 12 months? Or are you going to buy the tech stocks that have high price-to-earnings ratios that we’ll discuss momentarily?

Brad recently had a conversation with his 12-year-old daughter about investing. He asked her what stocks she liked. She listed the Magnificent Seven—Microsoft, Apple, Nvidia, Amazon, Tesla, Meta, and Google.

So, Brad showed her what one of those tech stocks would have been worth if she bought $2,000 of it 10 years ago. Then, Brad showed her a value stock that had a good dividend and has been around for decades. The tech stock wildly outperformed. Brad then explained the lost decade to his daughter and showed her value behavior vs growth behavior during that timeframe.

“It goes back to, ‘It’s not what you get; it’s what you’re able to keep.’ Trying to talk down a 12-year-old to making good, viable, fundamental decisions on stocks has been quite the task. I’m looking forward to documenting the journey.” – Brad Kasper

High Yield Bonds

Before we talk more about stocks, let’s compare high-quality bonds to high-yield bonds. High-yield bonds weren’t hurt as badly when bonds struggled immensely in 2022 and performed admirably in 2023. But will that be the case in 2024?

When Brad thinks about high-yield bonds, he looks at high-yield spreads over treasuries. Can you get paid enough to take the risk inside of a lower-quality type of bond? Historically, credit sensitive fixed income has been highly correlated to equity-like asset classes.

“Looking at the last three or four years, spreads have been fairly compressed. That means it hasn’t been overly attractive to buy high yields. If you’re going to take that risk, why wouldn’t you just do it on the equity side where you’re getting a strong dividend and stock-type participation.” – Brad Kasper

Why High Yields Shocked Brad Last Year

But high yields surprised Brad and many others in 2023. Last year, Brad thought that large-cap values should have outperformed the likes of high yields. And some did at the very end of the year. But throughout the year, high yields remained quite relevant.

However, Brad still argues that the spreads weren’t overly attractive. He’s looking for more of an event where the spreads widen out and create a better entry level for the credit. If he’s going to take credit-like risk, he thinks there are more opportunities to do so in dividend-playing large-cap stocks that have been around for a while.

What About Stocks?

Now, let’s talk more about those tech stocks and specifically focus on the S&P 500. The technology sector of the cap-weighted S&P 500 reached its highest level—as a total percentage of the S&P 500—since 1999. That was primarily due to the Magnificent Seven. Those seven stocks drove most of the return within the S&P 500 for much of 2023.

But then October 18 happened. We keep circling back to that date because that’s when the Fed said they were going to pause rate hikes. At that point, the S&P 500 was positive on the year by about 9%. It finished the year up 26%.

The S&P 500 Equal-Weight vs. the S&P 500 Cap-Weight

Even more surprising was the S&P 500 equal-weight, which equally weights your investment across all 500 companies in the S&P 500. The S&P 500 equal-weight was -4% on the year on October 18 and finished the year over 13%.

“From October 18 to the end of the year, the S&P 500 equal-weight actually outperformed the S&P 500 cap-weight. I find that to be significant as we move forward in 2024. Where’s our opportunity in 2024?” – Dean Barber

Throughout the year, the overall S&P 500 return was incredibly solid in 2023. Anyone who has a diversified portfolio might be wondering why their internationals and small-cap aren’t keeping up. When you look at the total return of the S&P 500 as the baseline of how your portfolio is doing, it might feel like it’s wildly underperforming. But again, it was seven stocks that was driving the total return for most of 2023.

“What we saw in the action of those names and how they drove the returns of the total index was a phenomenon that we haven’t seen in quite some time. Investors need to be aware of the reality of what that total return means versus the equal-weight, which is a much more realistic pulse.” – Brad Kasper

A Flashback to the Late 1990s

We want to circle back really quick to discussing how the technology sector faired in 1999 (and leading up to it). From 1997-1999, the narrative was that the brick and mortars were dead and that it was all about the Dot-Com companies. Value stocks such as bank and energy stocks were performing at a fairly normal rate, around the 8%-12% range. But some of the technology funds were getting high double-digit returns.

“When the house of cards came crashing down, the people who were overweight (in tech stocks) didn’t do well. The people who continued to have a diversified portfolio actually faired OK during the Dot-Com Bubble.” – Dean Barber

That was the entry into the lost decade, which favored value over technology. Brad feels like we could be in a very similar situation today. When it comes to the equal-weight, he wants you to be aware that there are other ways to measure what’s happening with the markets that are much healthier and more realistic of the broader picture.

Understanding Growth vs Value Investing

Sadly, we lost someone last year who really understood deep value vs growth investing in Charlie Munger. He believed that the price someone paid for a stock or company was very important.

“When we look at value stocks, there were price-to-earnings ratios in the single digits. I saw some that were as low as five to six times next year’s earnings. That’s a discount. That’s cheap relative to where a company should be valued.” – Dean Barber

Then, look at the PE ratios of the Magnificent Seven stocks. The average PE ratio of those stocks is around 50. So, you’re paying significantly more for the Magnificent Seven stocks than the value companies. That begs the question, when it comes to growth vs. value investing, is value the place to be in 2024? Or does it make more sense to be tech heavy and hope for similar returns as 2023?

Key Considerations for Growth vs Value Investing in 2024

With value investing, you’re really looking at a company’s price long-term. Well, how long is long-term, though? Brad got to thinking about that and realized that his perspective on that has changed over his career.

Brad broke into the industry in 2004. At the beginning of his career, he viewed long-term investing as 25-30 years. But if you ask anyone today about long-term investing, Brad thinks most people would say no more than three to five years.

If you look at Munger and Warren Buffett’s success, it didn’t happen in the first 20 years. It happened in Years 20-30 thanks to the long-term companies they invested in early on. They bought them at a good price and helped them grow. Suddenly, 25-30 years later, they had built one the largest and most influential investment firms.

When Brad thinks about the new year, he’s imploring people to be patient. It’s difficult for him to be patient and focus on long-term, value investing as well, so he understands that it’s much easier said than done.

“I’m not here to criticize people who think long-term investing is three to five years. Sometimes long-term investing feels more like three to five days to me, and I’m going crazy.” – Brad Kasper

So, Brad isn’t pointing any fingers, but he wants everyone to understand that patience truly is a virtue when it comes to investing.

Patience’s Place When Investing in 2024

At the end of each year, a lot of people want to be the person that said they knew what to invest in. But as we kick off 2024, we have a blank sheet in front of us. And there aren’t any odds makers from Las Vegas to serve as guidelines for what to invest in. Instead, it’s critical to look at it from a fundamental standpoint.

“That doesn’t mean that we’re going to say, ‘Here are our top picks. Go put your money here.’ The diversified portfolio is still the way to go.” – Dean Barber

Dean is a firm believer that the most important determining factor of return over time is asset allocation. It’s not stock picking. We’re not here to make predictions or bets. The way Brad and Dean think about risk is by taking a well-diversified approach and having exposure to several different asset classes. That includes bonds, domestic and international equities, and various alternatives.

Where Does the Opportunity Exist?

As long as the average PE ratio in the tech sector is in the ballpark of 50 or higher, really think about the fundamentals and valuations are telling you. That can help guide you as you’re figuring out where the opportunity exists.

“Tapping into opportunity doesn’t negate the role and importance of still having a balance and making sure you’re finding good diversification across your portfolio.” – Brad Kasper

Large-Cap Growth vs Large-Cap Value Investing in 2024

Dean and Brad don’t have a crystal ball to predict how the markets will perform in 2024. Still, they’re going to look at some broad categories and discuss what needs to be considered with growth vs value investing in 2024 for each category. Let’s start with large-cap growth vs large-cap value investing.

A Good Year for Value in 2024?

At the end of 2023, there was a much broader and fundamentally driven rally. That’s a positive thing for value. All year, tech and growth drastically outperformed value. When you get those instances of dislocation, look at the price of the tech names compared to the value names. Where’s the opportunity?

“In this case, I would argue that value probably outperforms growth in 2024. But it’s not that we don’t want growth exposure.” – Brad Kasper

Brad is looking for a broader exposure to growth in 2024. He doesn’t want to overweight the Magnificent Seven that have wildly elevated PE ratios. Brad isn’t saying not to own them. You just don’t want them to make up 25% of your portfolio. That’s not a knock on the Magnificent Seven, as Dean and Brad think they’re phenomenal companies that should be held. Having them make up a quarter or more of your portfolio isn’t something they’re comfortable with, though.

Dean also thinks value will have a good year and outperform growth. He’s a big fan of the high-dividend ETFs or individual stock.

Small-Cap Growth vs Small-Cap Value Investing in 2024

Now, let’s do the same growth vs value investing breakdown for the small-cap for 2024. Brad is still leaning on the value side because that’s where he sees the biggest discount in terms of valuations. However, he wants to point out that those valuations have been attractive for the past couple of years and haven’t been the winner.

“You can have all the best information in front of you and it still doesn’t mean it will outperform.” – Brad Kasper

Brad and Dean are leaning more on the cost to access capital within some of the smaller tech names and growth names that need capital to promote growth.

“I think it’s going to become more expensive. When you have higher rates, it’s harder to tap into capital that way. I think it favors small-cap value.” – Brad Kasper

Small-Cap Value vs Large-Cap Value

Now that Brad and Dean have shared why they’re leaning toward value, let’s get their thoughts on small-cap value vs large-cap value. Brad still thinks that large-cap needs to be a dominant portion of an overall asset allocation portfolio. However, he suggests that small-caps should find increased weight to portfolios.

“I think small-caps outperform large-caps this year. I’ll make that blanket statement and live with it. I don’t pretend to be the profit of the markets. As soon as you think you are, get the heck out because you will be sobered up very quickly.” – Brad Kasper

The Bottom Line with Growth vs Value Investing in 2024

As we wrap up this article on growth vs value investing in 2024, Brad believes there are a few main takeaways. He says that inflation is the primary driver of how 2024 will pan out. Similar to one of his mentors, Paul Volcker, Powell has been committed to killing inflation at all costs.

“It’s something that history will have to tell us, but so far, I think he’s done a pretty decent job. But if inflation remains high and he needs to stay aggressive on rates, I think the scenario of a recession could play out.” – Brad Kasper

Diversity Matters

Brad hopes that investors won’t try to be predictive with what markets will do after following along with his conversation with Dean. While it can be fun to make predictions, having a diversified portfolio is what matters most.

“At the end of the day, we believe in diversity and the role of asset classes over time.” – Brad Kasper

If you have questions about what it takes to have a diversified portfolio and the key differences between growth vs. value investing, reach out to us. You can start a conversation with our team below.

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It can be difficult to have a patient mindset with investing, but it’s pivotal in times of heightened volatility. We hope what Brad and Dean have shared with you can help you make educated, well-informed investment decisions.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC, does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.