Figure 2: Zooming in on Recent History

We don’t deny that at the current moment, interest rate directionality is a key focus for the market; in fact, we’ve made the case that a reversal of the crowded rising rates consensus could put a bid under DHS. And crowded is an understatement: 38 of 43 economics teams anticipate a rise in 10-Year Treasury yields by the fourth quarter of 2019, with a median target of 3.42%.1 If they are proven wrong—and if the market keeps “caring” about rates in 2018 the way it did in 2016 and 2017—DHS could surprise investors to the upside.

But as we have shown, interest rates have been a tough investment metric over the long term. There must be something more to the dividend payers versus growth stocks decision.

That “something” is relative valuations.

Flagging March 2009

It’s important to take note any time a data point comes back to what it was flashing in 2008 or 2009, the crisis years. S&P 500 Growth’s performance series relative to the WisdomTree U.S. High Dividend Index is back to March 12, 2009, levels, the same week the market put in its lowest close of the generation—and seven days after the end of that growth cycle. From this point, the next three years witnessed the WisdomTree Index outperform by 744 bps per year.

…And 1999

Because DHS and the WisdomTree Index it tracks were created in 2006, figure 3 goes back to the 1990s to capture two decades of growth versus value fundamentals. The S&P 500 Growth Index’s trailing price/earnings ratio is 26.6, about 8 multiple points more than the WisdomTree U.S. High Dividend Index (18.6).2 Similarly, the gap between the S&P 500 Growth and S&P 500 Value indexes is 7.39 multiple points.

Going back to the tech bubble, we saw a gap about this wide in January 1999. We know with hindsight that the growth stock bubble ended a year later at much higher levels. True, the current valuation gap can certainly stretch out like it did then, but backing a repeat of that legendary performance run may not be wise.

If the clock is, in fact, ticking on yesterday’s market leadership, DHS could be primed if dividends come back into style.

Figure 3: S&P 500 Growth Price-to-Sales Minus S&P 500 Value

This article has been republished with permission from Wisdom Tree.