Value stocks still valuable after strong year

It was a long time coming for value stocks.

The Russell 1000 Value index fell 10% in 2022 compared to a 19.4% drop for the S&P 500 and a 30% loss for the Russell 1000 Growth index. Yes, it was still a “down year” for value stocks, but it was also a banner year in relative terms.

A peek at the updated Periodic Table of Investment Returns (also known as the Callan chart) reveals U.S. Large-Cap Value as the best performing equity category last year (trailing only commodities, cash, and gold). U.S. Large-Cap Growth, on the other hand, finished dead last among equities.

Value’s massive outperformance was in stark contrast to recent years when growth strategies, turbocharged by technology companies, routinely dusted their value-oriented cousins. Large-Cap Value lagged Large-Cap Growth in five straight calendar years (2017-21). Until last year, Growth had beaten Value in 10 of the 13 years dating back to 2009.

With the losing streak now officially over, should investors embrace this new trend as their friend? Or have growth stocks been sufficiently battered to represent the more attractive option going forward?

The financial world tends to frame the growth vs value debate in zero-sum terms, but that’s oversimplifying the conversation. One or the other will inevitably perform better in any given year, but investors can, and should, make room for both in their portfolio. That may sound basic enough, but value was out of favor for so long that many investors gave up and now have little or no exposure.

Less than two years ago, a new generation of investors were publicly declaring Warren Buffett’s value-centric approach outdated and out-of-touch with the new economy. Buffett, as usual, enjoyed the last laugh. Berkshire Hathaway stock gained 4% in 2022. In the last 24 months it has risen 39%, compared to a 11% decline for the Russell 1000 Growth index. Value investing is not dead after all.

In our view, value stocks deserve a larger slice of your portfolio even after last year’s outperformance. You do, of course, want to be mindful of “chasing returns,” but the macro environment for equities will almost certainly remain challenging. Conditions, in other words, will be more similar to 2022 than to the decade prior.

Slower earnings growth and higher interest rates both favor value over growth (even if the Federal Reserve pauses its rate hikes sooner than many expect). The Fed also continues to tighten its balance sheet, meaning quantitative tightening rather than quantitative easing (QE). The oft-mentioned “soft landing” is still possible, but a recession feels more realistic.

Less-friendly Fed policy does not necessarily mean stocks will be negative in the year ahead. It does, however, appear more like the 1990s than the 2010s. And guess what performed well in those years? Value and growth. From 1991 to 1999, the Fed Funds Rate ranged from 3-6% and the S&P 500 was positive eight times in those nine years. Growth led five times. Value led four.

So, growth stocks should not be ignored either. The NASDAQ just concluded its worst year since 2008 and saw its price-to-earnings (P/E) ratio fall 44% from a year earlier. There are plenty of quality growth stocks trading at a discount for those investors armed with patience and a higher risk tolerance. It’s a dangerous move, however, to view last year as an outlier and re-adopt the outlook that growth is the only approach worth embracing.

Value stocks are back. And while they are unlikely to outperform as much as they did in 2022, it may well be worth increasing your exposure.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.



Ben Marks & Brett Angel

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