The latest jobs report says the economy is still booming while manufacturing data suggests a slowdown is ahead—who’s right? It’s akin to someone telling you the waters are choppy and someone else saying it’s smooth right before a boat ride, but either way, value can help investors navigate today’s murky waters in the markets.
Before diving into value-oriented equities, it’s necessary to get an understanding of how to define value.
“Value stocks trade at a lower price relative to their fundamentals,” said Marko Dedovic, Chief Operating Officer at Threadvest in New York City. “While their fundamentals are strong, the price is trading below their historical levels and this could be for various reasons. Either there was a problem in a company, the sector may have fallen out of favor, etc… The idea behind investing in value is that fundamentals are strong and the market will realize a full potential of these companies at some point and they will have high appreciation.”
2019 started strong for U.S. equities, but the U.S.-China trade war and inverted yield curves threw the major indexes off with volatility the past few months. However, the volatile environment is the perfect backdrop for an investor to seek value.
“Value stocks often outperform growth stocks in environments like the one we are experiencing now—at the latter end of the business cycle,” said Dan Trumbower, Senior Wealth Advisor at Halpern Financial, Inc. in Rockville, Maryland. “Growth stocks typically do well in risk-on environments, during the expansion phase of the business cycle.”
Some analysts will argue whether the bull market still has legs, which could state the case for more growth equities. Value, however, gets the nod from analysts who are in the camp of the opposite.
Value Gets The Nod
“Growth and value are usually cyclical,” said Dedovic. “Historically, growth stocks have done better in bull markets when companies’ earnings are rising. When the economy starts cooling and there is less expected earnings growth the high valuation of growth stocks gets ‘punished’ and they cool off. Value stocks usually do well in early stages in economic recovery and during periods of weak economic growth, but lag during bull markets as investors seek more ‘exciting’ industries with higher earnings growth potential.”
History is also on the side of value, especially when looking back to 1926.
“Although growth stocks have been in favor over the past decade returning an annual return of 16.3% compared to value stocks at 12.9%,” said Mark R. Morley of RJ Cloud Advisors and Company in Tulsa, Oklahoma, “the question should be ‘is it time to change investment philosophy based on recent data and maybe even embrace market timing into and out of different market cap-weighted stocks or funds.’ In order to get a full picture of value vs. growth stocks, it would do an investor good to look at historical data and not rely on recency bias. While growth stocks have returned 16.3% over the past decade, their historical return dating back to 1926 is 9.7% and is probably a better indicator of future returns. Value stocks over the past decade have returned 12.9% but their historical return dating back to 1926 has been 12.7% or a 3% premium over Growth stocks.”
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