Change Partners: Some Thoughts on Market Regimes

A lot of investors talk about “market regimes.” This term can have several different meanings. Classically, a market regime is characterized primarily by four measures: interest rates, inflation, GDP growth, and unemployment; often added to these are characterizations of government fiscal and monetary policy. But one can also talk about a market regime in terms of which stock factors work and which don’t.

The Value Inversion

For the past few years, investors have noticed what we call a “value inversion,” which appears to be getting progressively worse. Theoretically—and normally—stocks with low price-to-sales ratios (cheap stocks) outperform those with high price-to-sales ratios (expensive stocks). Such was the case over the majority of the current century, and indeed, as James O’Shaughnessy has shown in What Works on Wall Street, for most of the twentieth century too.