Heather McPherson, Portfolio Manager,
T. Rowe Price US Large‑Cap Value Equity Strategy
Since the end of the global financial crisis, more than a decade ago, growth stocks have significantly outperformed their value stock counterparts. Given the dominance of growth stocks over this extended period, many investors now believe that value is due a comeback – and that 2020 could be the year. While there are no apparent signals to suggest that such a trend reversal is imminent, history shows that when it does occur, the change tends to be abrupt and extreme.
Over long time periods, value stocks have historically outperformed growth stocks. But the relative performance tends to be cyclical –raising the question of the timing of a reversal. While it is impossible to accurately time such a change, relative valuation can often be the catalyst. As we begin 2020, the outperformance of growth over value in the US equity market is just shy of the all-time peak of growth outperformance, reached in early 2000 – right before the tech bubble burst.
Is a value comeback imminent?
The short answer is that it is impossible to predict when the trend may reverse. However, over the 10-year period ending 30th September 2019, value underperformed growth by 1.5 standard deviations relative to its average 10-year performance, based on 10-year rolling periods starting in 1926. And following periods of such extreme dispersion between the two styles, history shows that the odds of value outperforming growth over the subsequent three to five years are very high – greater than 70% .
Past performance is not a reliable indicator of future performance.
Source: Refinitiv Datastream. © 2019 Refinitiv. All rights reserved. Comparison of Russell 1000 Growth Index and Russell 1000 Value Index (% total returns) for 10-year period ending 30th December 2019.
The growth style’s dominance since the global financial crisis has been particularly propelled by a narrow group of technology titans – the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google), which have benefited from a strong US consumer as well as robust global growth.
We should note, however, that we are in uncharted territory in terms of how these huge tech companies and other high-growth companies will perform in a changing economic environment.
The business models of companies such as Google and Facebook are highly dependent on sales of advertisements. There are no previous cycles where such dominant companies had to adapt to a more sluggish economy that could undermine advertising revenues. In contrast, many of the companies within more traditional areas of value have been operating for a half-century or more, so it is possible to understand how things have played out for these firms when the economy changed course.
Looking ahead in 2020
Generally, we remain optimistic about the US economy, given a healthy consumer backdrop, strong corporate balance sheets, and recent indications that global economic growth is likely bottoming. However, US trade policy uncertainty and elevated geopolitical tensions temper our overall level of optimism.
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