Will Value Outperform Growth Stocks in 2020?

Diane Jaffee, a senior portfolio manager at TCW Group, believed that “valuations for value stocks, as represented by the Russell 1000 Value Index, are the most attractive they have been, relative to the Russell 1000 Growth Index, since 2001.”

Because “Historically, value tends to do well when investors are willing to look forward one to two years and think about estimated earnings. Growth tends to do well when investors think the economy is peaking and ready to go lower,” she said.

Jaffee pointed out: If we go out two years, the value group’s earnings for the 12-month period ended June 30, 2022, are expected to increase by 20.9%, from the previous 12-month period, compared with an 18.5% increase for the growth group, based on consensus estimates among analysts polled by FactSet.

Here are some data to validate the fact that Value has underperformed Growth based on forward price-to-earnings ratios for the indexes have moved over the past 20 years:

Using another matrix, divide the Value P/E by the growth P/E, reinforced the fact that Value has underperformed Growth since 2001:

Here’s a 10-year chart comparing the performance of the Russell 1000 Value Index and the Growth Index:

Here is the total returns for the indexes for the various long periods:

Here is the average annual returns for the same periods:

The value index has performed better than the growth index only for the 20-year period, which includes the bursting of the dot-com bubble from September 2000 through October 2002.

When asked if the technological transformation of the economy means things are different this time and maybe growth strategies will continue to run ahead of value strategies for years, Jaffee said, “everything is cyclical.”

Source:  MarketWatch, 2020-08-13, “Value stocks, which trade lowest to growth stocks since 2001, look like a smart play as the economy rebounds”