Value stocks are on a tear, but before you bet on this continuing you should consider the history. After many years in a row in which it lagged growth stocks, value lately has come roaring back. Since the end of November, the S&P 500 Value Index has gained 8.2% versus a 2.1% loss for the S&P 500 Growth Index. This 10.3 percentage point spread is one of the highest ever recorded for a five-week period.
Contrary to a popular narrative on Wall Street, that doesn’t mean value’s relative strength will persist over the next few months. That narrative traces to the bursting of the internet bubble in March 2000. For a number of years prior to then, growth stocks trounced value. But once the bubble burst, value staged a huge rebound that persisted for many months.
This is just one data point. For a more comprehensive picture, I analyzed value’s relative strength back to 1926, courtesy of data from Dartmouth College professor Ken French. On average, a given month’s relative strength persisted for just one month. With holding periods lasting two or more months, value’s performance against growth was only randomly related to what came before.
This randomness can be appreciated anecdotally. Think back to March 2021, which was another period in which value appeared to be reasserting its historical dominance over growth. Over the five weeks through March 8, 2021, the S&P 500 Value Index (as measured by the Vanguard S&P 500 Value ETF
) beat the S&P 500 Growth Index (as measured by the Vanguard S&P 500 Value ETF
) by even more than it has over this most recent period.
Yet as the chart below shows, value lagged growth for most of 2021 — with its relative strength bottoming on Nov. 30.
Or take the last time prior to last March when S&P 500 Value outperformed S&P 500 Growth by as much as it has over the last five weeks. That came in April 2009, just as the Great Financial Crisis was ending. From then until the end of 2009, however, growth and value ran neck-and-neck.
So if you’re keeping score for these three instances in which value beat growth by as much as it has recently, there’s one case in which value relative strength continued, one in which it reversed itself, and one in which there was no trend one way or the other. Good luck extrapolating that into the future.
What can predict value’s relative strength?
If value’s relative strength doesn’t persist, can something else predict when value is likely to beat growth? I’m not aware of anything.
The most obvious candidate for predicting value’s relative strength would be valuation. In theory, value stocks should perform better, relative to growth, to the extent they trade at lower ratios of price to earnings, sales, cash flow, book value, and so forth. But this has not been the case historically. A number of years ago the valuation spread between value and growth grew to all-time record levels, for example, and yet growth stocks continued to outperform value stocks.
Over the past century, value has significantly outperformed growth — on average, that is. I could find no pattern for when value’s relative strength becomes greater or lesser.
If you want to bet that the future is like the past, you need to be a long-term investor rather than try to trade between value and growth. By focusing long-term, you’re betting on experiencing many more periods like the last five weeks in which value greatly outperforms growth.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org