Is value investing dead? A provocative question that I’ve had to answer a lot in recent years, and a fair one in light of market performance patterns over the past decade-plus. Excluding the stunning rebound of value stocks post-pandemic, growth-style equities have more or less reigned supreme since the Global Financial Crisis (GFC), as the search for fast-growing companies relative to lackluster economic growth became a guiding principle for many equity investors.
Can we be sure the next decade of equity investing will look the same? I don’t think so. In fact, I believe the drivers of the next economic and market cycle could favor value stocks over their growth counterparts.
Challenging My Thesis: Five Recurring Client Questions
To illustrate, I put my thesis to the test against some questions clients have been asking me lately:
1. Doesn’t equity performance depend on the prevailing economic cycle?
Conventional wisdom says yes, but our research shows this is only true to some extent: Historically, periods in which value stocks have outperformed before giving way to growth leadership have lasted anywhere from 10 to 20 years and don’t always line up neatly with economic recessions. As FIGURE 1 shows, value sometimes outperforms growth coming out of a recession, but not without fail. I think a more accurate guide to equity style performance can be found in a set of four factors—inflation, real interest rates, liquidity, and GDP—that seem to better align with value cycles, and suggest that we’re still in the early stages of the value cycle that began in 2020.