Value Down, But Less Bad Nearly Everything Else

The S&P 500 recently officially entered a bear market and for those paying attention to the state of affairs in equity markets this year, they knew it was just a matter of time.

That’s confirmation of what many advisors already knew: Equity investing in 2022 is boiling down to getting out altogether or embracing the less bad. Obviously, abandoning stocks wholesale isn’t the best of ideas because bonds are faltering and without equity exposure, clients aren’t positioned for an eventual rebound.

Getting back to the issue of less bad, there is value stocks. Year-to-date, the S&P 500 Value Index is down 12%. Clearly nothing to write home about, but that’s better than the Bloomberg US Aggregate Bond Index, the S&P 500 and the S&P 500 Growth Index. In fact, the value benchmark is also sporting lower annualized volatility than the two aforementioned equity gauges.

As has been widely reported, value is finally having a moment (possibly much more than that) against growth – the latter of which topped the former in 11 of the previous 15 calendar years.

Regime Change May Finally Be Here

Not only is value topping growth this year after a long spell of it being the other way around, inexpensive stocks are beating their pricier rivals by substantial margins, indicating a credible regime change could be afoot.

“But 2022 may actually mark a regime change: the return of Value investing long foretold, but basically unrealized over the last decade and a half,” notes Goldman Sachs Equity Strategist Timothy Ramsey. “Considering monthly returns over the last 20 years, January saw one of the largest differentials in style returns, with Value outperforming Growth by a wide margin. Previous moves of this magnitude in the last two decades have favored Growth.”

There are some interesting elements regarding the strength of value stocks this year. First, the energy sector is doing heavy lifting. It’s the only group in the S&P 500 that’s positive year-to-date while financial services – a group that supposedly benefits from rising interest rates – is slumping.

Second, value’s advantage isn’t a large-cap only phenomenon. Inexpensive stocks in the mid- and small-cap spaces are beating their growth rivals, too. That’s another sign that this value run could prove persistent and, moreover, reward clients with notable returns when equities rebound.

Value in Season

As advisors know, value stocks usually are better sources of income than growth equivalents and cheap equities, owing to cyclicality, tend to outperform in rising rate environments – a thesis that’s proving true again in 2022. Those traits hold true across market capitalization spectrums and geography, including ex-US developed markets and emerging markets.

“In a rising-rate and high-inflationary environment, Value strategies generally may enhance returns, owing to structurally higher exposure to interest rate beneficiaries (including Financials) and Real Assets (such as Energy and Real Estate),” adds Goldman’s Ramsey.

Another element that’s interesting is that while the current environment may appear conducive to ignoring smaller stocks, the fact is broader mid- and small-cap benchmarks feature more value than, say, the S&P 500.

“For these reasons, now might be an opportune time to implement a rebalancing, or even an overweight allocation to Value across various equity portfolio sleeves. Such a shift may help address new market realities that may inform a medium-term investment landscape very different from the last decade,” concludes Ramsey.

Related: Shelter from Storms: Dividends Demand Attention