Value stocks do fall, but before you bet on it, you should consider history. After several years in which it lagged behind growth stocks, value has recently returned. Since the end of November, the S&P 500 Value Index has gained 8.2%, compared to 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 the five-week period.
Contrary to a popular narrative on Wall Street, this does not mean that the relative strength of the price will persist over the next few months. This story points to the bursting of the Internet bubble in March 2000. For several years before that, growth stocks dropped in value. But once the bubble burst, there was a huge price jump that lasted for several months.
This is just one data point. For a more comprehensive picture, I analyzed the relative strength of price in 1926, courtesy of data from Dartmouth College professor Ken French. On average, the relative strength of a given month only persists for one month. With the holding period lasting two or more months, the performance of price against growth was related only randomly to the first.
This randomness can be appreciated anecdotally. Think of March 2021, another period in which the price appeared to be re-establishing its historical dominance over growth. In the five weeks through March 8, 2021, the S&P 500 Price Index (as measured by the Vanguard S&P 500 Price ETF VOOV,
) beat the S&P 500 Growth Index (as measured by the Vanguard S&P 500 Value ETF Voog,
) even more so than in this most recent period.
Yet as the chart below shows, the price has increased for most of 2021 – its relative strength is down on November 30th.
Or take the last time before last March when S&P 500 value outperformed S&P 500 growth over the past five weeks. This came in April 2009, just as the great financial crisis was coming to an end. From then until the end of 2009, however, growth and price went neck and neck.
So if you’re keeping score for these three examples in which price has beaten the most recent rise, there is one case in which price continued to gain relative strength, one in which it reversed itself, and one in which there was no trend. Was. way or other. Good luck extrapolating this in the future.
Can one estimate the relative strength of a price?
If price’s relative strength doesn’t hold up, can anything else predict when price might outpace growth? I don’t know anything.
The most obvious candidate for predicting the relative power of a value would be valuation. In theory, value stocks should outperform growth relative to the extent to which they trade in a lower ratio of price to earnings, sales, cash flow, book value, and so forth. But historically this has not been the case. For example, several years ago the valuation gap between value and growth swelled to all-time record levels, and yet growth stocks continue to outperform value stocks.
Over the past century, price has outperformed growth—on average, that is. I didn’t find any pattern when the relative strength of the price moves higher or lower.
If you want to bet that the future is like the past, you need to become a long-term investor rather than trying to trade between value and growth. By focusing on the longer term, you are betting on experiencing many more periods, like the last five weeks, in which price outperforms growth.
Mark Hulbert is a regular contributor to Businesshala. Their Hulbert Ratings track investment newsletters that pay a flat fee to be audited. he can be reached here [email protected]
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