
NOTE: This is not investment advice.
I ended my last post by talking about historic events that took place in the first half of 2020 – multiple circuit breaker triggers, Federal Reserve‘s announcement of "Unlimited Quantitative Easing" and subsequent purchase of US corporate debt. As someone who combines Warren Buffett’s value investing principles with macro-economic trends, the recent liquidity injection by the Federal Reserve made me question my core investing philosophy. I decided to use historical data to observe relative performance of different asset classes during periods of Quantitative Easing (QE) and Quantitative Tightening (QT) to see indications of underlying trends.
I realized that there was a lot of material to be covered in this topic, so I focus this article on the following key points:
- Shift in sentiment from Value to Growth stocks
- Gold as a natural market hedge
- Valuation of the US Stock Market
Data Preparation
All my data is obtained from Yahoo Finance where one can download historical price for almost any equity or ETF/ETN/ETP that trades on major indexes. The only caveat – dividends and stock-splits need to be factored in prior to analysis (if only every stock operated like Berkshire Hathaway Class-A shares, right?). I download the dividend history, historical stock price and stock-splits (if applicable) and calculate the actual price of the equity/ETF in question:
The resulting output looks like this:

The most common method of measuring performance of any asset is to calculate the rate of return from a start date, compounding with time. The Performance Analytics package in Python didn’t meet my requirements, so I create a custom method to calculate the return for a given asset:
Since I want to analyze performance between periods of QE and QT, I download the history of Federal Reserves’ total assets from their website to estimate date ranges QE and QT for later analysis. The balance sheet of the Fed (in $Millions) is as follows:
The area highlighted in red indicate periods of US Recession (yes, we’re currently in a recession). One can see the use of monetary stimulus during economic downturn, with the Fed expanding its balance sheet from approx. $1 Trillion to $4.5 Trillion between 2008–2015. The previous round of stimulus was dwarfed by the $3 Trillion in asset purchase executed by the Fed between February 2020-June 2020 alone. I will use these two periods for QE, and the remainder of time between 2004–2020 will be assumed as periods of sound monetary policy.
Shift in sentiment from Value to Growth
Great fundamentals, solid free cashflows and strong balance sheets are qualities that define Warren Buffett’s investing philosophy. He found undervalued companies and invested for the long run, earning dividends and portfolio growth in the process. Growth companies, however, don’t boast of large (or any) margins, but achieve exponential growth in sales, sacrificing profits in the short term. These companies can eventually mature into deep value companies, or go bust.
For my analysis, I use $SPYG and $SPYV indices that track the Growth and Value companies in the S&P500, respectively. I first plot the cumulative return on these two indexes from 2001–2020, along with a ratio of the SPYV and SPYG prices over time to get a sense of converge between the two.

There are some interesting points to note from the above visual:
- Value outperformed growth through the dot com crash up until the 2008 Great Recession, trending downwards ever since
- Growth was almost stagnant from 2002–2008, but has witnessed as astronomical rise post recession
- 2020 marks the first time compounding return of growth stocks overtook value in the last 20 years
The dot-com crash of 2000 was concentrated heavily on grossly overvalued technology stocks fueled by private investments during the 90s bull market. The Fed did not intervene to inject any liquidity directly into the markets, which is probably why growth had such a difficult time through 2008. In the wake of the Great Recession, the economy witnessed a rapid monetary expansion resulting in historically low interest rates. Much needed capital was provided to private companies at near-zero rates, kick-starting another leg up for these equities.
In order to visualize relative performance through QE and QT, I break out the compounding returns for both indexes into different time-periods

The above graphs help tell a detailed story:
- Value clearly outperforms until 2008, with growth taking over until 2016, possibly due to the availability of cheap capital
- 2016-mid 2017 seems to be a toss-up between the two, but there seems to be another stimulus that pushes valuations up once again – President Trumps TCJA bill perhaps?
- Dovish actions of the Fed post December-2018 sell-off explains the subsequent rally
Soo…Is Value Investing dead?
Maybe. Or maybe a period of QT will usher in a new era of classic investing principles. It seems to be the case that value investing works really well in an environment with sound money, which is not reality at the moment.
Gold as a Market Hedge
Gold has served as a safe haven in times of market turmoil, providing risk-adjusted returns and much needed liquidity during crisis. Since it is not susceptible to currency manipulation, it serves as a store of value during manic money printing and inflation. I plot the same graph as above comparing Gold and the S&P500:

It looks like 2001–2012 was the best time to invest in gold compared to the S&P500, with another jump to the upside in recent months. I conduct a moving average crossover analysis on the ratio of Gold and S&P500 to understand long term investing trends. I choose the 200 day and 50 month Simple Moving Average (SMA) for my analysis since I’m looking a large date range and it smooths out short-term volatility to indicate long-term buying opportunities.

Short term MA (in this case, 200 Day SMA) moving higher than longer term MA indicates a ‘Golden Cross’ which is usually a buying opportunity for the asset. On the contrary, a higher long-term MA crossover indicates a death cross. 2003–2012 was a good buying opportunity for gold compared to the S&P500, and it seems that another run up could turn bullish if the Fed money printing continues, pushing gold prices higher. The Exponential Moving Average (EMA) is another tool that can be used to measure trends. EMA gives more weight to current data. The newest price data will have a higher impact the moving average, with older price data having a lesser impact, making it more reactive to current fluctuations in price.

Although the general trend remains intact, there is a wider spread between the two moving averages for EMA compared to SMA. This tells me that a long-term breakout for gold may be on the cards, but it would require another catalyst to continue moving up.
Valuation of the US Stock Market
The investing community uses multiple metrics to determine whether Stock Market is over or undervalued compared to historical figures. The S&P500 may be at near all-time highs, but that does not necessary imply that it’s overvalued at these levels. I use the ratio of S&P 500 to Gold over time to get a cross-asset view of the market and see if the S&P 500 has hit an all-time high w.r.t gold.

Although the S&P 500/Gold ratio is at the 2007/08 levels, it is far below it’s peak during the dot-com crash. The above graph inspired me to view different sectors (specifically technology) of the SPY index for indications of overbought conditions. I first look at the NASDAQ Composite that contains all the technology stocks in the broader market. Technology has experienced the largest growth in the past decade, making it an ideal first choice. I compare the ratio of NASDAQ and S&P to see the relative growth of the former index.

NASDAQ/S&P500 ratio was last at these levels during the 2000 dot com bubble, but the rate of increase seems different this time. Private investment flooded the tech sector, pushing values to exorbitant levels in a very short time. The NASDAQ may be at the same levels as 2000s, but majority of the run up can be attributed to the 5 large cap tech stocks. Technology as a whole has consistently outperformed the broader market in the past few decades, driven by exponential growth and cheap capital. I separate the technology sector from the broader index and compare the overall performance with all other sectors combined. It helps paint a picture of sheer dominance shown by the technology sector across the board, giving rise to the first trillion-dollar valuations in history.

The market excluding technology is only up ~35% since 2016, while the tech sector has exploded, netting a 170% return during the same timeframe! While the market has yet to recover from the March panic sell-off, the tech sector has already made another record high for the year. Are we in for a repeat of 2001?
Parting Thoughts
- Growth has overshadowed traditional Value investing for over a decade, fueled by capital investments and low interest rates. A reversal may take place if the cost to borrow increases once again or artificial liquidity is suddenly sucked out of the market. Both seem unlikely given current market conditions.
- The Gold/S&P500 ratio is a good indicator to measure relative performance against equities and helps gauge broader market sentiment. Gold seems to be making an indication of starting another leg up with the right catalyst (some more monetary stimulus perhaps?).
- Technology has been the frontrunner of the longest bull market in history, only time will tell if these valuations are the new normal, or if the sector is in for a rude awakening.
Investing during these times can be challenging – companies filing for bankruptcy skyrocketed in valuations after the news, making unexpected moves in the market seem normal. What are some good trading techniques to handle this market volatility? My answer – Momentum Investing (coming soon).
Thank you for reading! Please let me know if you think I missed something that could help shed some light on this topic, your feedback would be much appreciated. The Github link for this analysis is attached below.