A Resurgence In Value

Value in resurgence


This newsletter issue takes a look at value stocks compared to growth stocks, and makes an argument for at least a mild resurgence of value performance. It also provides an update on the current inflation situation, particularly for housing.

Sentiment on investing is still near a historical low point.

With about 90 years of data, value stocks have historically outperformed growth stocks in aggregate, although not in every decade.

In particular, this past 2010s decade has been crushingly in growth stocks’ favor, and it hasn’t been close. The mega-cap internet stocks like Microsoft ( MSFT ), Apple ( AAPL ), Amazon ( AMZN ), Facebook ( FB ), Alphabet ( GOOG ) ( GOOGL ), Netflix ( NFLX ), Salesforce ( CRM ) and a host of other growth companies like Visa ( V ) have been the main drivers of US stock market and indeed global stock market performance, as most value sectors lagged badly and chopped sideways for much of the decade.

That trend differs significantly from multiple previous decades, where an investing approach that leaned towards buying out-of-favor stocks did better. This past decade was a particularly brutal one for value investors, and that fact has been well-known for years.

This long-term chart shows the Russell 1000 Value Total Return index divided by the Russell 1000 Growth Total Return index. When it’s going up it means value stocks in aggregate are outperforming, and when it’s going down it means growth stocks in aggregate are outperforming. That particular chart relies on FTSE Russell’s metrics for what constitutes a value stock vs a growth stock. In truth, there is no firm definition between the two, other than that stocks tend to be cheaper, slower-growing companies that often pay a dividend and return capital to shareholders, while growth stocks tend to be more expensive and faster growing, and are still reinvesting heavily into their business.

As the chart shows, 1) value stocks outperformed for much of the 1980s leading into the savings and loan crisis , 2) growth stocks outperformed for much of the 1990s leading into the dot-com bubble , 3) value stocks outperformed for much of the 2000s leading into the subprime mortgage crisis , and 4) growth stocks outperformed for much of the 2010s leading into the COVID-19 pandemic and subsequent fiscally-driven inflationary reversal. The two factors, growth and value, went in big cycles as economic bubbles and monetary policy shifted around and ultimately ended with excesses each time.

Looking back at the past three years, we see that the ratio of value to growth stock performance bottomed in 2020 and started to turn up after lockdowns eased and vaccines were announced. It then had a correction again in 2021 to a higher low, in part due to the Delta variant and fiscal spending slowdowns, but now is now seemingly back in an uptrend with energy stocks and financials holding up pretty well: I’m watching to see if it holds this trend or not. Recent years have been full of people making “growth to value rotation” calls, but this one has been in place for a while and came with a recession and a rather fundamental shift in fiscal and monetary policy, which is when most major rotations occur.
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If we want to go back more than the four decades that Russell has data for, here’s a great chart. It shows the rolling 5-year return differential between value and growth stocks from the early 1930s to 2020. When it’s green (positive), it means value stocks have outperformed over that period, and when it’s red (negative), it means growth stocks have outperformed: Value stocks outperformed during 82% of rolling 5-year periods according to that data set, but the 1930s and the 2010s were major exceptions where growth stocks outperformed by large and persistent gaps.

Anyone who has followed my work for a while knows that I regularly use the 1930s/1940s analogue to describe the […]

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