The Return of Value

In what has been a turbulent year (to say the least), the one constant in the investing world seemed to be the continued outperformance of large growth stocks (and the big-name tech stocks specifically). Historically, research indicates value stocks have the highest returns, but the last 10 years have told a different story. In the 10 years ending November 30, 2020, the US Large Value stocks (represented by the Russell 1000 Value Index, an index that tracks large US value stocks) has returned 10.7% annualized, which is in line with historical norms. On the other hand, US Large Growth stocks (represented by the Russell 1000 Growth Index, an index that tracks US large growth stocks) returned 17.0% over that same time frame. So, the anomaly here was not value, but just how well growth has done.

The only other time US Large Growth stocks have outperformed US Large Value to such an extent was the Dot-com bubble. As can be seen in the below chart that depicts the value’s outperformance relative to the growth over 10-year periods. As can be seen, after the dot-com bubble burst, value roared back, and hugely outperformed growth until the financial crisis.

 

However, more recently, value has returned to the forefront. In the three months ending November 30, 2020, US Large Value stocks have returned nearly 9%, while US Large Growth stocks have been flat. This is even more pronounced when you look at how small value stocks (as represented by the Russell 2000 Value Index) have performed.

 

There are several reasons to think that small value’s outperformance of the last few months could persist. First, the progress on the vaccine front will be a boost to all corners of the market but could be a stronger relative boost to small value stocks, which tend to be more sensitive to macroeconomic conditions.

Additionally, more monetary and fiscal stimulus, and the potential for lagged impact from the tremendous amount of monetary and fiscal stimulus that has already been doled out in the face of the Coronavirus, should also lead to relative strength from small and value stocks. That said, there are certainly risks to the resurgence of small value. The recent surge in Coronavirus cases across the US and Western Europe likely auger tough economic times in the short-term, and any setbacks in the race for the vaccine could deflate value’s return.

These factors all tie into the historical trend of value stocks outperforming growth stocks coming out of recessions. However, the long-term outlook looks good for small value, and disciplined, patient investors will likely be rewarded with outsized returns for staying invested in small value stocks in the long run.