Over the past few weeks, equity markets around the world have sold off, following U.S. stocks, which initially started to feel weak around the beginning of October after traders started to fret about rising interest rates.
The subsequent sell-off has been short and aggressive. Since the beginning of the month, the S&P 500 has wiped out all of its gains for 2018. Initial concerns that rising interest rates will lead to a slowdown in economic growth have been reinforced by a series of weak earnings reports, showing that the trade war the Trump administration is pursuing is having an impact on earnings growth.
Time for value to shine?
Without a doubt, volatility is returning to the markets, and in this environment value investors should prosper.
So far, the results have been mixed. At first glance, it would appear that non-growth stocks are holding up better than growth peers. Since peaking at the end of August, the tech-heavy Nasdaq index has declined by around 12%, compared to just 8.3% for the S&P 500 and 5.3% for the Dow Jones Industrial Average. From this perspective, it looks as if growth investors are suffering more.
A deeper dive shows that this isn't really the case. Over the past 12 months, the Russell 2000 Value Index has declined in value by 5.7% excluding dividends, underperforming the Russell 2000 Growth Index by 5.5%. However, since the end of August, growth has underperformed value by 3.4%. So, if you bought value right at the end of August when the performance gap between the two different styles was at its widest, as a value investor today, you would be outperforming growth investors.
At the end of August, the one-year performance gap between the Russell 2000 Growth Index and Russell 2000 Value Index was around 13%.
Value vs. growth
Even though these headline figures might show that value is still struggling to compete against growth, it seems as if there has been a general shift in opinions among investors when it comes to value versus growth over the past few weeks.
Some of the market's most highly priced and highly followed growth stocks such as Amazon (AMZN, Financial) and Netflix (NFLX, Financial) have seen a sharp reversal in fortunes.
Since the end of August, shares in Amazon, for example, are down 18%, compared to the S&P 500 decline of 8.3%. Shares in video streaming service Netflix are down 17% over the same period. If we throw the Russell 2000 Value Index into the mix, it is down 14% over this period, outperforming both Amazon and Netflix but underperforming the S&P 500.
Admittedly, these are only rough numbers, but they do show that despite the recent global equity sell-off, value stocks are still being overlooked by investors. It is interesting to note that the S&P 500 has produced a better performance than the value index over the past few weeks despite its large weighting towards high-growth tech stocks.
No safe haven
Considering the above performance, it is no surprise that investors have turned their backs on value over the past decade. If value stocks are not a safe haven when the market falls, when are they worth buying?
That being said, the one advantage I see to being a value investor today over being a growth investor is fundamentals. On a purely fundamental basis, many growth stocks lack the fundamental backstop that low valuations provide in the environment we are in today.
High priced growth stocks are desirable when the market is going up, but when volatility returns, sky-high valuations mean nothing.
Take Amazon and Netflix for example. Even though these two stocks have lost nearly a fifth of their value over the past few weeks, how can we be sure they are worth by today? There is little fundamental support for both companies at the current level.
I'm not comfortable working with that level of risk, and that is why I'm sticking with value investing for the time being. If the sell-off continues, I believe value stocks will start to shine. It might take a while, but having a fundamental backstop is, in my view, more essential than fast profits.
Disclosure: The author owns no share mentioned.
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