Style-Box Analysis Update: No Surprise, Value Continues to Outperform

In what is a highly unusual start to 2022, every single bond and stock asset class has negative returns for 2022 YTD, which given the historical relationships, particularly between equity asset class returns and Treasury returns, seems pretty remarkable.

Here’s the spreadsheet tracking “growth versus value” across equity asset classes:

Value is clearly outperforming growth, probably due to the energy, utility and consumer staples sectors, which – if you track the sector SPDR ETF’s to track sector returns – all have positive returns YTD for 2022.

But other than that, 2022 is looking pretty grim.

This update started tracking average annual returns in 2021: look at the average, annual returns for large-cap growth, particularly the return premium for the 5-year period. That tells me that a recovery in equity values might start with the small and mid-cap asset classes first or – put another way – large-cap growth could lag for a while.

The bottom section of the spreadsheet shows YTD returns (full-year returns are in the heavy-bordered columns). The SP 500’s YTD decline¬† of -15.16% seems normal given the cumulative, two-year return for the SP 500 of 47.72% (the sum of 2020 and 2021 SP 500 total returns), while the QQQ decline this year of -24.01%, also seems proportional with the 2-year (calendar 2020 and 2021) cumulative return for the Q’s of 76.04%.

As of mid-May, 2022 so far anyway, this seems like a normal correction for the large-cap indices, given the 2020 and 2021 capital market returns, with an eye towards the longer-term average annual returns.

Assume all of this is perspective and none of this is a prediction.

The remarkable stat for me comes from the sentiment perspective: I thought I read that “bullish” market sentiment is or was the lowest since 1992 according to the AAII survey.

Summary / conclusion: Value continues to trounce growth stocks within the style asset class across all market caps, and the longer-term returns tell us that growth might continue to lag for some time. It’s impossible to say how long the style “alpha” will be sustained. Growth stocks had a remarkable decade from 2010 through the end of the pandemic. That doesn’t mean value’s outperformance will be of an equivalent time frame. If gradually higher interest rates continue to prevail, my guess is value will likely see outperformance versus it’s growth market-cap equivalent.

That’s strictly a guess.

None of this is a prediction. None of this is a recommendation to buy, hold or sell. It’s strictly an opinion and those opinions – like the markets – can change quickly.

Thanks for reading.

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