Why still value now Why still value now http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\kayaking-sunset-small.jpg April 16 2021 April 16 2021

Why still value now

Because conditions and history suggest it has further to run.

Published April 16 2021
My Content

We continue to hear investors ask if it’s too late to get into value stocks. After all, they have significantly outperformed growth stocks over the past two quarters according to various large-cap and small-cap growth and value equity indexes, particularly in this year’s first three months. The concern is whether value’s run may be starting to peter out, a view prompted in part by growth’s re-emergence the past few weeks.

Let’s talk about that. If you had to list catalysts historically supportive of value stocks, it might consist of the following: An economy coming out of a recession. Interest rates rising from low levels. Monetary and fiscal stimulus at high levels. Inflation slowly starting to rise. Employment improving. Manufacturing, housing, consumer spending and confidence and other macro indicators also on the rise. Higher earnings with rising upward revisions. Inventories low just as demand is increasing. Does all this sound familiar? It should.

Now let’s consider one other factor: valuations. Would it have been better to get into value stocks toward the end of last year, before their big price rally and upward revisions to earnings? Absolutely. Yet even after its strong run through the first quarter, value’s performance as measured by the Russell 1000 Value (large cap) and Russell 2000 Value (small cap) Indexes is roughly flat relative to growth as measured by the Russell 1000 Growth and Russell 2000 Growth Indexes over the past 12 months. Over the past 3-year period, large-cap growth’s annualized returns are more than double that of large-cap value’s, and small-cap growth is nearly 6 percentage points above small-cap value over the same period. So, it’s sort of hard to argue that value is extended.

Two more arguments: history suggests rising rates tend to be more problematic for growth than value stocks, and that cyclical sectors of the economy where value lies (Energy, Financials, Industrials, Materials, Consumer Dscretionary) tend to perform their best in the first few years of recovery. From Wall Street to the Federal Reserve, expectations are 2021 GDP growth will be the strongest since at least 1984. Are there risks? Certainly. The potential for a new wave of Covid lockdowns, higher taxes and a Fed that initiates a rate-hiking cycle earlier than expected among them. But we think the strong conditions present today aren’t going to disappear anytime soon. So, why still value now? Because from market and macro perspectives, we believe it’s still a value story.

Tags Equity . Active Management . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Growth stocks are typically more volatile than value stocks.

Russell 1000® Growth Index: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Growth Index: Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Value Index: Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

Stocks are subject to risks and fluctuate in value.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

Federated Equity Management Company of Pennsylvania

1836809095