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As measured by the S&P 500 Growth and S&P 500 Value indexes, growth stocks are slightly outperforming value rivals over the first two months of 2023 after value soundly trounced growth in 2022.
Admittedly, two months is a small timeframe and when using the pair of aforementioned benchmarks, growth’s 2023 advantage over value is negligible. So there is something to the argument, which is widely held, that value will extend its winning ways over growth as this year unfolds.
Importantly, value’s advantage isn’t a large-cap only phenomenon. Inexpensive stocks in the mid- and small-cap spaces are beating their growth rivals, too. That’s another sign that this value run could prove persistent and, moreover, reward clients with notable returns when equities rebound.
Boosting the allure of value stocks in 2023 is monetary policy. As in the Federal Reserve might not have the luxury of laying off the rate hike gas pedal.
Value Very Much in Style
Fortunately for advisors and clients alike, some experts agree that value has upside potential this year.
“Growth stocks have led the U.S. equity rally so far this year, halting outperformance in 2022 by value equities. We believe value stocks can resume their climb as major central banks keep interest rates higher for longer. Higher rates reduce the value of future cash flows, weighing more on growth stocks and reinforcing our developed market equities underweight. Underneath that, our sector and region preferences tilt to value with quality attributes and growth at a reasonable price,” according to BlackRock.
Value and quality are different factors, but there as the former increases in potency, more of it can seep into the latter. That’s a reminder to advisors that clients may be attracted to cheap stocks, but not all cheap stocks are “good stocks.”
Additionally, the modest advantage currently sported by growth (it was larger last month) could rapidly evaporate, bringing value back into the limelight. In fact, this could almost be a forgone conclusion.
“Higher interest rates and inflation, and a steeper yield curve. That all favors value over growth, in our view. It’s not about choosing one factor over another: Factors mean different things to different people, and the composition of factors also changes over time. Case in point: The healthcare sector is now a modest overweight in the MSCI USA Value index compared with an underweight in 2008,” notes BlackRock.
Macro Environment Bodes Well for Value
Indeed, the macroeconomic, though not appealing in a broad sense, is increasingly hospitable to value investors. It’s not uncommon for experts and pundits to say the January reading of the Consumer Price Index (CPI) was a mirage. If nothing else, “progress” is still hard to come by and stubbornly high inflation confirms the Fed was late to the inflation-fighting party. That could mean hopes of just three rate hikes of 25 basis points apiece this year are already off the table.
Bottom line: Market participants opting to fight the Fed this year and contrarians would be apt to embrace growth stocks, but history confirms fighting the Fed is usually a futile endeavor.
“Value tends to outperform when the yield curve steepens, we find. While value historically underperforms heading into recession because capital-intensive companies can’t respond quickly to changing cycles, we think that could be different in this atypical economic cycle. Value is still attractive after being beaten down for so long. Companies in the value bucket have also had time to prepare for a welltelegraphed downturn. Case in point: Many banks have already provisioned for losses in advance of a recession. Lastly, we expect a mild recession, so we think the performance impact is likely to be softer on value companies than in past cycles,” concludes BlackRock.
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