On paper, we are 10 months into a new bull market—a time when value stocks traditionally outperform. But, a few short bursts aside, that hasn’t been the case this time around. Since the low on March 23, 2020, growth stocks—those that plow profits back into the business and strive for long-term expansion—have beaten value, which tends to rely on the economic cycle to boost earnings and returns more profits to shareholders. This is a well-known discrepancy, and many pundits have identified a potential reason: Value-heavy sectors were most affected by lockdowns, while the Tech and Tech-like companies that were most resilient (and benefited from the big switch to working from home and shopping online) are growth-heavy. Once the world is vaccinated and businesses reopen, the popular narrative holds that it will be value’s time to shine.
We see a glaring problem here. Yes, value usually does best early in a bull market. But that is generally because after it gets pounded during a long, brutal bear market, no one wants to own it—that is where the, well, value comes from. It is also the great irony surrounding value investing: Value’s nice long-term returns (prior to the last decade or so) cluster in big bursts that happen when value is also least loved.
Today value is hardly unloved. With precious few exceptions, it is getting heaps of attention and affection today. You can see it in press coverage salivating over the prospect of outsized returns in Financials, Energy and other value-heavy sectors as normalcy returns later this year. You can also see it in Wall Street forecasts, which heavily favor value stocks and non-US markets (which are generally more value-heavy). Following are several snippets we rounded up—not to cast aspersions or quibble, but to illustrate just how common expectations of value leadership are this year in the investment community.
- “… we see the impact of a successful vaccine roll-out as decisive for the economy. This will likely support ‘value’ stocks, especially small caps, which have been worst hit by the Covid-19 lockdowns. Moreover, we think European equities, which have lagged US equities significantly, will continue to bounce back as the impact of the vaccine is felt across Europe.”[i]
- “A return to normal by the second half of the year should help extend the rotation that began in early November away from technology/growth leadership toward cyclical/value stocks.”[ii]
- “The largest beneficiaries will be stocks at the epicenter of the pandemic, such as Consumer Discretionary, Financials and Energy.”[iii]
- “Looking ahead, we believe that investors will seek out opportunities in areas that are less richly priced and have yet to fully recover. These areas will likely include assets that are most sensitive to the U.S. business cycle (known as cyclical stocks) and to COVID-19 dynamics.”[iv]
- “… while there will be bouts of volatility along the way, the switch into value/cyclicals and out of growth is likely to have several more chapters.”[v]
- “In style terms, a more normal cyclical recovery could continue to boost value stocks relative to growth, a reversal of the powerful trend toward growth dominance—and unprecedented dispersion of stock returns—seen since the 2008–2009 global financial crisis.”[vi]
- “Currency and local market valuations favoring [Developed Markets] ex-US over US equities, also supported by cyclical outperformance in 2021, and a rotation away from growth into value sectors and regions.”[vii]
- “Investors have begun to look at the potential for revenue and earnings growth in many ‘out-of-favour’ areas that suffered during the pandemic. The most obvious of these are those that were effectively shut-down, such as hotels, restaurants, leisure enterprises and travel companies. It seems highly plausible that when the recovery, takes hold many of these businesses will experience a sharp rebound.”[viii]
- “A robust recovery could trigger a rally that expands to include some of the most unloved value stocks. Investors may also start to take notice of value companies’ recent efficiency improvements, which in turn could drive a more durable value rally.”[ix]
- “[We expect] the economic recovery to broaden out in 2021 on the heels of vaccine deployment. This will benefit more cyclical areas of the market.”[x]
- “ … we expect equity markets outside of the U.S. to outperform, largely because of lower valuations and a higher dividend yield. Likewise, we are expecting value stocks to outperform growth over the next decade based on our fundamental assessment.”[xi]
There are others besides those 11, but you get the drift. The vast majority of forecasters expect value to lead, propelling European, Financials, Energy, Industrials and other hard-hit categories to outperform this year. These forecasts are all backed by data and seemingly sound logic. But markets often defy all of that, because they are forward-looking and efficient. They price in all widely known information, which includes professional forecasts, and they usually end up upending those expectations.
The reasoning allegedly supporting value today is also widely known. That includes its long history of early-cycle outperformance and expectations for a big vaccine boost. To argue these aren’t already reflected in stock prices is to argue markets aren’t efficient. We wouldn’t recommend taking that position, as it is usually a losing proposition.
We don’t make long-term forecasts, but if you put us in the chair of a dunk tank full of ice water and threatened to hit the bullseye if we didn’t make an educated guess, we would say we doubt value leads materially until most pundits give up on it. If history is any indication, that probably won’t be until after another bear market—one that is longer-lasting and features the panicky late stretch that leads investors to capitulate on economically sensitive stocks. Then we will probably see a raft of this time is different-type articles arguing value won’t lead. Maybe they’ll cite its underperformance during this recovery as a sign of a new normal. Again, just an educated guess. But in the meantime, we think stocks are likeliest to prove the pro-value crowd wrong with continued growth leadership.
[i] “Small Caps and Emerging Markets Tipped for Outperformance in 2021,” Tim Human, IR Magazine, 12/8/2020.
[ii] “Global Market Outlook 2021 – The Old Normal,” Russell Investments.
[iii] “2021 Global Market Outlook: What Lies Ahead in the Post-COVID-19 World?” JPMorgan, 1/14/2010.
[iv] “Market Outlook 2021 A New Beginning: Investing in a Post-COVID World,” Citi Personal Wealth Management, December 2020.
[v] “Markets in a Minute,” New York Life Investments, 1/20/2021.
[vi] “Global Markets Quarterly Update: Fourth Quarter 2020,” T.Rowe Price, 12/31/2020.
[vii] “2021 Investment Outlook,” Invesco, November 2020.
[viii] “Outlook 2021: Global and Thematic Equities,” Schroders, 12/7/2020.
[ix] “Global Tech, Emerging Markets and Pandemic Uncertainties: Opportunities and Risks in 2021,” Chris Flood, Financial Times, 1/9/2021.
[x] “2021 Outlook: The Runway Looks Clear,” UBS, 12/11/2020.
[xi] “Vanguard Economic and Market Outlook for 2021: Approaching the Dawn,” Vanguard Research, December 2020.