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Value Vaults Ahead, but Can It Last?

June 2020 
By Nanette Abuhoff Jacobson

Value has taken the lead over growth during the most recent market rebound, but will it last?

Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

The US equity market (as measured by the S&P 500 Index)1 has staged a remarkable rebound over the past few months. As of June 15, the market has gained 40% from its COVID-19 low on March 23. Notably, the shape of the rally has shifted during that time. In mid-May, market leadership rotated from growth to value stocks, raising a provocative question: How sustainable is value’s outperformance going forward?


The Case for Value Now

Longer term, I suspect the global economy is not set up for strong growth, given the accumulation of massive government debt, the demographics of an aging population, and increased costs associated with deglobalization. Therefore, I still prefer growth stocks overall. In the near term, however, here are four points to consider in favor of value: 

  1. History - Value has typically outperformed growth coming right out of recessions.
  2. Fundamentals - The economy is in the early stages of recovery from the COVID-19 shock.
  3. Valuations - Value-oriented sectors are currently trading at potentially attractive valuations.
  4. Technicals - Value is “under-owned,” due in part to its underperformance over the past decade.

Understandably, many investors are gun shy about jumping into value when its performance has been so disappointing for so long. Ironically, this may be precisely why now is a good time to give value stocks a look.

For years, their better-performing growth counterparts have been the market darling of institutional, retail, and hedge fund investors alike. And there are still reasons to own growth, as it is dominated by technology: Demand for data, storage, cloud computing, and artificial intelligence is rising and likely to be structural in nature, not cyclical.

But observe the historical pattern (FIGURE 1). US value has handily outperformed US growth (by 2.8% annualized) during the initial recovery phase of the economic cycle. However, this outperformance has only lasted an average of four months. In the other three economic phases—expansion, late stage, and “bust”—growth has outperformed.


Figure 1

MSCI USA Value Index vs MSCI USA Growth Index Since 12/31/1974


Sources: Datastream, Wellington Management. Chart data as of 3/31/2020. Past performance does not guarantee future results. Investors cannot directly invest in an index. The underlying data for the chart is the monthly excess return of the MSCI USA Value Index over the MSCI USA Growth Index since 12/31/74. Each month of data is associated with an economic phase,* so we are able to group the relative performance of US value versus US growth by phase. The analysis includes 543 months/data points, which can be broken down into: 126 bust, 192 expansion, 120 late stage, and 105 recovery. When the value versus growth monthly returns are grouped by phase, we can find the average return of that data stream and annualize it. *We use the change in growth + the level of the Composite Leading Indicator Index to yield four phases of the economic cycle: “Late stage” (decelerating, above-trend growth); “Bust” (decelerating, below-trend growth); “Recovery” (accelerating, below-trend growth); and “Expansion” (accelerating, above-trend growth). We have broadened the definition of “Bust” to include slowdowns because significant drawdowns can, and do, occur in the absence of recession. The MSCI USA Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics in the US. The MSCI USA Value Index captures large and mid-cap US securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.


Investment Implications 

  • Despite the risk of a second COVID-19 wave later this year, I believe the global economy is on a path to recovery.
  • Given depressed value-stock valuations and growth-heavy portfolios, I think investors should consider adding value exposure to achieve better balance. 
  • Specific equity sectors worth considering at this time include financials—a traditional value sector—and other cyclical areas such as industrials and consumer discretionary.
  • With the global economy likely not poised for robust long-term growth, I expect demand to revert back to growth-oriented sectors that provide stable earnings, strong free cash flow, low leverage, and superior growth potential.


The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds. 


Subscribe to Nanette’s commentary at hartfordfunds.com/nanette

1 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • Different investment styles may go in and out favor, which may cause underperformance to the broader stock market.

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