In August 2021, we looked at the year-to-date performance of growth and value stocks (see the Weekly Wire above), noting the Russell 3000 Growth Index and Russell 3000 Value Index were setting up for a 2021 photo finish, with the former up 15.4% and the latter up 16.9%, respectively, through July 31. While the Growth Index pulled ahead of the Value Index into year-end, the spread between the indices was modest, with the Growth Index up 25% and the Value Index up 23% in 2021.
At the time, we thought it was the uncertainty around key economic variables that was responsible for the jockeying between the indices. Specifically, we thought the durability of the recovery, the persistency of inflation and the direction of bond yields, and how those variables played out would have a meaningful impact on the performance of the two primary styles of investing. Well, we are only five weeks into the new year but, as of now, Growth and Value are no longer neck and neck. With the Russell 3000 Growth Index off 10% and the Russell 3000 Value Index off 2% year to date (see the chart above), those key economic variables have all landed, we think, in Value’s favor.
Consider the economy, while slowed of late due to Omicron, grew nearly 7% in the fourth quarter and appears to be accelerating as the COVID-19 case count drops; inflation has proven higher and more persistent than expected and the yield on the US 10-Year Note is at a 2+ year high. Said differently, value investing tends to do well during periods of broad economic growth and rising inflation and yields (several recent disappointing earnings reports from leading growth stocks have also weighed on the Growth Index). While growth has outperformed value over the past 10 years, value is having its day in the sun, which is a powerful reminder of the benefits of having broad equity exposure in one’s portfolio.