Another reason to think 'value'
History suggests a rotation from ‘growth’ may be at hand.
With vaccinations spreading, monetary spigots wide open, more fiscal stimulus on the way and a pandemic-weary consumer chomping at the bit to go out and enjoy the world again, the recovery from the steep but brief Covid recession that we think ended last summer appears certain to accelerate in the months ahead. Indeed, these forces prompted our macroeconomic policy team last month to up its 2021 real GDP growth forecast to 5.3%, which if met would represent the fastest pace since 1984. Such acceleration would be manna for companies in cyclical value sectors such as Energy, Financials, Industrials and Consumer Discretionary. Having been challenged by a Covid-led collapse in demand, beaten-down companies in these industries are prepped to benefit as American businesses and consumers ramp up spending. This is partly why the PRISM® asset allocation committee raised value allocations this month to two-thirds of the overall equity overweight in the stock-bond model.
Growth versus value
As constructive as this fundamental case may be, however, there arguably is an equally compelling technical reason for value. As measured by the respective Russell 1000 Value and Russell 1000 Growth indexes, last year saw value stocks underperform growth stocks by more than 35 percentage points, the biggest performance gap in the 42-year history of the Russell 1000 style indices, capping a 4-year run in which growth dominated value. So why on earth would we suggest investors consider value stocks now? Because history arguably is on value’s side.
To be sure, past performance is no guarantee of future performance. But throughout the tenure of the Russell indexes, whenever one style did meaningfully better or worse over several years, there tended to be a subsequent rotation to the other style. To wit: after underperforming growth by a cumulative 60.6% from Jan. 1, 1998 through Dec. 31, 1999, value outperformed growth 29.4% in 2000, its biggest 1-year outperformance ever and the start of a 7-year winning streak. Over the last 42 years, value stocks have fared better than growth stocks 20 times, or 48% of the time, and there were 11 years when value beat growth by more than 10%.
Of nine instances when value underperformed growth by more than 10%, 2020 was the worst, in part because it was such a strong year for a handful of Big Tech behemoths that seem to perform well regardless of the macro or technical environment. But given where we are in the economic cycle (early), given that growth stocks tend to be more sensitive to rising rates (they drive up the discount rate on future cash flows, a key factor in growth stock valuations) and given historical relationships between value and growth, there are reasons to think value is poised to take over leadership. In fact, value did outperform growth in the past year’s fourth quarter, though the two are running roughly neck and neck so far this year. Will value’s late 2020 run last? Again, while there are no guarantees, we think it will. At the very least, we believe it’s a case worth considering.