Is Value Dead?
Given recent performance, some clients have raised the question about whether the value premium is “dead.” As evidenced-based investors, we typically turn to the data to demonstrate and reinforce that value is one of the single most important factors in investing. In fact, next to the equity premium itself (the stock market minus one-month Treasury bills), the value premium is, perhaps, the most persistent and significant. From an economic perspective, if you believe and expect that there are differences in expected returns across stocks, one can easily extrapolate that there is a value premium. This means that stocks with high discount rates are expressed as lower prices, which in turn, means that lower priced stocks tilt toward higher expected returns. However, the value premia are highly volatile and can appear quite suddenly. This means if you are not invested in these stocks, you will miss that momentum change and the corresponding upward movement of these stocks.
You certainly would not have been faulted for dialing back on value over the past decade as it has been in somewhat of a bear market, especially when compared to growth stocks. In the chart below, you can see how value has performed over a very long time horizon. No asset class performs in a linear fashion as is evident in the graph. However, a preponderance of years dating back to 1937 in the US, show the value premium has been accretive to those that had this exposure in their portfolios.
According to a recent communication from Bank of America, there are “several reasons” why investors believe there will be a comeback in value, including:
- In 14 of the last 14 recessions, value stocks led in the recovery, and economists believe that we are nearing the GDP growth trough
- Profits drive style cycles, and profits forecast indicates trough growth in Q2 2020. In every profits recovery except two (post-Tech Bubble and 2016), the trough to peak in corporate profits growth saw value lead by a large margin
- Value is currently deeply neglected
- Value stocks trade at record levels of cheapness relative to momentum stocks; furthermore, growth factors trade at a record premium to the market on almost any measure
Finally, the top stocks in the market, FAAMA (Facebook, Amazon, Apple, Microsoft and Alphabet) account for roughly 40% and 20% of the NASDAQ and S&P 500 respectively. These are unsustainable valuations and will likely lead to lower expected returns of these growth stocks over time. Therefore, value may well be about to see the light of day…again.