Is the Market Poised for a Value Shift?

The stock market continues to exhibit resiliency in the face of disrupting factors, ranging from a global pandemic to a severe economic decline to a controversial presidential election. For many years, Wall Street analysts warned a market correction was long overdue. Despite intermittent volatility, those concerns largely have not borne out.

You may be tired of worrying about a correction, but there’s no denying many share prices appear to have topped out, if not in an outright bubble. While growth-oriented investors may be willing to keep rolling the dice and hope prices rise even higher, a growing number are looking to transition to value stocks.

Value stocks are considered those priced lower than merited given certain company fundamentals, such as earnings, sales or book value. They are often believed to be overlooked in the market because their returns are relatively unimpressive. However, value stocks are kind of like the tortoise in the race against the hare (i.e., growth stocks). They may slowly plod along but, because they lack “flash” or volatility, can outpace their growth peers in the long term.

Some stock analysts are starting to favor value stocks in the current landscape. They believe additional stimulus efforts will increase the money supply, and that will drive a commodity boost. Commodity outperformance, in turn, tends to be more positive for value stocks. One investment analyst recently projected value stocks could outperform growth stocks by as much as 30%, as measured from Q4 of 2020 through Q3 of 2024.

Moving forward, the analysts at Russell Investments say they favor non-U.S. equities over U.S. equities, undervalued cyclical value stocks over expensive technology and growth stocks, and the value offered by emerging markets (EM) equities.

From a performance standpoint, the long-term story is quite different from recent short-term numbers. In 2020, value funds on average lost more than growth funds in the first-quarter market collapse and continued to lag after the market bounced back. By year end, value stock funds posted one of their worst years on record relative to growth funds.

However, when you compare very long-term performance, value stocks have doubled the success of growth stocks. According to Bank of America, since 1926, value investing has returned 1,344,600% compared to 626,600% by growth investing.

We often recommend diversification among investment portfolios, and adding value stocks or value-oriented mutual funds/ETFs is another way to diversify an equity allocation. If you’d like more guidance about stocks and their role in a retirement portfolio, please feel free to contact us.