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Nearly six months into 2021 and it's safe to say tales of the value stock resurgence are becoming redundant, but in a good way.
This is the quick tale of the tape. As of June 11, the S&P Value Index is up 18.1% year-to-date, an advantage of 800 basis points over its growth counterpart and of 420 basis points over the S&P 500. After lagging growth for over a decade, value's 2021 showing is undoubtedly impressive and long overdue at that.
Discussing the once long-running growth/value gap is still relevant today because it underscores an important point about investment factors: Performance is fluid and can shift without notice. In other words, while the getting is good for value these days, factor-savvy clients, particularly those that benefited from growth's dominance over the past decade, may be inquiring about for how long is this value rally sustainable.
Assessing Sustainability of Value Upside
Indeed, there are factors in place that bode well for continued value upside. Treasury yields could resume their upswing, supporting bank stocks. Even that doesn't happen, the Federal Reserve, as soon as later this month, could open the door for banks to resume buybacks and growing dividends.
Banks are just one element of the value equation. Soaring commodities prices are supportive of other value sectors (energy and materials). That's an inflationary proposition and inflation itself is constructive for another cyclical sector – real estate. In other words, the now nine-month old value resurgence could have some life to it.
That's the conversation advisors can have with client. Pinpointing end dates for factor leadership, that's a different and one advisors would do well to avoid.
“Whether value continues to outperform growth or suffers a reversal is a function of numerous exogenous variables, prominently including the course of inflation, the level of interest rates, and the prospects for growth as the economy recovers from last year’s shutdowns,” said S&P Dow Jones Indices Managing Director Craig Lazzara in a recent note.
As Lazarra points out, since 1995, there have been six cycles in which value topped growth. The briefest lasted six months while another (2003-2007) lasted four years. In other words, the current cycle likely has longer to go because the aforementioned six-month spurt is more exception than rule.
Advisors can allay another client concern: That the easy money has already been made in value. The S&P 500 Value Index gaining 18.1% in less than six months would seem to imply as much, but if history is an accurate guide, value usually appreciates in delicate fashion.
“It’s conceptually possible that, although value outperformed for more than four years, most of the outperformance occurred in the early months, with only a small dollop for latecomers,” adds Lazzara. “It turns out that this was not the case; early investors did not reap a disproportionate share of value’s gains.”
Learning to Love Value Strength While It Lasts
Ultimately, the value comeback is a positive because it extends the bull market and it's not proving punitive for growth. Growth is just lagging, it's not trading lower.
And at the end of the day, advisors don't have crystal balls, meaning they don't know for how long value will be king of the factor hill. Where advisors can add value for clients that missed the start of the value resurgence is by putting things in perspective. Fortunately, that perspective is readily available and credible.
“We don’t know for how much longer value will outperform growth. We don’t know what the ultimate margin of outperformance will be,” concludes Lazzara. “But the current nine-month cycle is not remarkably long by historical standards, and if it keeps going, history.”
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