This past weekend’s cover story of Barron’s compared the performance of value and growth stocks and argued that despite a miserable run of performance in the last nine years, the sun may finally be starting to shine on the backs of value stocks. This weekend’s story included the chart below that we provided showing the relative performance of value vs. growth over the last several years for both large (Russell 1000) and small (Russell 2000) cap stocks. For each index, a rising line indicates value stocks outperforming growth while a falling line indicates outperformance of growth stocks relative to value.
For both small and large cap stocks, outperformance in value peaked between 2006 and 2008 just ahead of the financial crisis. Since then, value has had its moments, but the trend has been steadily lower. More recently, at least among small caps, we have started to see a turnaround in the performance of value over growth. After three straight years of underperformance, the Russell 2000 value index is underperforming the Russell 2000 growth index by 6.4 percentage points (-2.52% vs -8.95%). Among large-cap stocks, the performance spread between Russell 1000 value and growth is not nearly as wide, but even here value stocks are outperforming on a YTD basis. Whether this reversal in relative returns is just another short-term mean reversion trade or the beginning of a longer-term trend remains to be seen, but based on the changing trends we have seen between a number of other high quality vs. low quality characteristics (credit rating, short interest, valuation, etc.) where low quality is finally taking a back seat to high quality as well as a shift in FOMC policy that began last year, the sun may indeed shine on value stocks for longer this time around.