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A Quarter in the Red

We look under the hood at the quarter’s Morningstar Style Box trends and their (lack of) impact on investors.

Securities In This Article
Microsoft Corp
Adobe Inc
Meta Platforms Inc Class A
Exxon Mobil Corp

A September swoon in growth stocks took a big bite out of the group’s performance upswing in the third quarter, with only large-cap growth stocks finishing the period in the green.

But while much of the focus in 2021 has been on the back-and-forth performance swings in the value versus growth performance gap, the bigger story in the third quarter was market capitalization. Large-company stocks were on balance the strongest performers, followed by midsized companies and then small-cap stocks.

As growths stocks generally fared better than blend and value names, the Morningstar U.S. Large Growth Index returned 2.35% while the Morningstar U.S. Small Growth Index fell 4.5%. For the year to date, however, it’s more of a value story, with mid-value and small-value leading performance among U.S. stocks.

September marked a change of change of tenor across the stock market as the Morningstar U.S. Market index lost 4.58%, the largest monthly loss the index has seen since March 2020.

Under the surface, the September declines were broad-based. Energy, the only sector with losses in August, came out on top in September with a return of nearly 10% as every other sector turned negative. The sector’s strong performance was led by the “Oil and Gas - Exploration and Production” industry, as oil giants posted strong gains; for example, ConocoPhillips COP was up 22.0% and ExxonMobil XOM was up 7.9%. Meanwhile, the utilities, communication services, and basic materials sectors each lost over 6%.

Growth and value were neck-and-neck in negative territory until the final week of September, when high-tech, large growth names saw some of the steepest losses. For the month overall, Leading detractors included Microsoft MSFT, down 6.61%, Facebook FB, down 10.54%, and Adobe ADBE, which lost 13.26%.

Despite September’s widespread losses, the Morningstar Style Box is a sea of green throughout the one-, three-, and five-year trailing performance periods, highlighting the importance of playing the long game.

And for now, U.S. equity valuations are high: The Morningstar U.S. Market Index ended the quarter at an 8% premium. Large- and mid-growth companies are the most richly valued, continuing the trend we saw last quarter. Fairly valued pockets can still be found in value and small-cap stocks.

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