Value’s Advantage Over Growth Is Simply Stunning

The current state of affairs in equity markets is, not to be trite, more about finding “less bad” than it is identifying “really good.”

To be fair, some strategies are standing out this year, but the 2022 broad definition of “standout” is either modest gains or a year-to-date loss that’s significantly less than the 16% shed by the S&P 500. In the search for less bad/sort of impressive, value is bound to be part of the conversation.

Using the S&P 500 Value Index as the bogie, the proof is on value’s side. That index is down just 7.69% year-to-date and it’s worth acknowledging that plenty of value funds, both actively managed and passive, are doing far better than that. Some are even generating positive returns.

Those are the breaks when growth is the primary culprit in the market’s 2022 slump, but a deeper look into value’s advantage over growth is warranted.

Value Advantage Something to Behold

Through the first four months of 2022, value’s advantage over growth is historically wide and data confirm as much.

“The 15% gap between Value and Growth is obviously high by historical standards, and represents a dramatic reversal from recent trends. (As recently as nine months ago, the gap favored Growth by more than 10%.),” notes S&P Dow Jones Indices.

One of the more interesting points about value’s dominance this year is that it’s being accrued with no help from the financial services sector – usually the sector most positively correlated to rising interest rates. In fact, that group is an abject disappointment in 2022. Despite two interest rates hike by the Federal Reserve and another four or five on the way, the S&P 500 Financial Services Index is down almost 14% year-to-date. Despite that obvious headwind, value has momentum.

“The acceleration of Value’s performance is nearly as impressive from this perspective. At the end of April 2022, Value was 6.5% ahead of Growth; just five months ago, for the year ending November 2021, Growth was 13.3% ahead of Value,” adds S&P Dow Jones.

Why It Matters

Sometimes, investing can be as simple as knowing what to avoid. Growth stocks are making that easy this year. However, there’s more to the story.

In this case, the “more” is pertinent because value’s extreme advantage over growth could be a sign that the advantage is set to narrow.

“The fact that a data point is high in its historical distribution doesn’t mean that next month’s observation can’t be equally high, or higher,” concludes S&P Dow Jones. “There’s no guarantee, for that matter, that the distribution is stable, and that the next observation won’t surpass the previous all-time record. That said, history suggests that the torrid outperformance of Value is unlikely to continue, at least in the short term, and that the next big move in the Value-Growth differential is more likely to be down than up.”

It’s reasonable to expect that the value/growth chasm will narrow over the near-term. What remains to be settled is that if that occurs, will it be way of a growth stock rally or value equities faltering?