Value
Momentum’s Terrible, Horrible, No Good, Very Bad Day!
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If Momentum and Growth investors thought they were escaping 2020 unscathed, they learned otherwise on Monday. Pfizer’s promising news about a COVID-19 vaccine was met with universal excitement and investors rearranging portfolios—taking gains in long-term winners and plowing into beaten-down cyclical stocks.
VLT’s Struggles Are Telling Us Something
Our Very Long Term (VLT) Momentum algorithm has been a very good “confirmatory” market tool over the years, especially at the onset of a new cyclical bull market. But VLT has proven to be of little to no value in navigating this year’s gyrations. VLT’s latest flip-flops reinforce our view that the market leaderboard is set to be rearranged.
Election—Another Chance For Value
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As we Chinese watch the elegant display of the western democratic process this election season, we can’t help but think there are indeed people less fortunate than us “commies.” Worse yet, some of these people are Value investors.
Consumer Discretionary: Neither Fish Nor Fowl
The combination of rebounding economic activity and a surging (peaking?) enchantment with mega cap growth stocks is pressing investors to make an important tactical call: whether to take profits in some highfliers and shift assets to sectors with more cyclical exposure and better valuations.
Back To The Brink
Despite equal-weighted measures’ long-time underperformance, all valuation ratios we monitor for the median S&P 500 stock have returned to their top historical deciles. Even worse, our new equally-weighted “Valuation Composite,” based on these measures, closed August at a 98th percentile reading.
Research Preview: Not Your Parents’ “Discretionary”
The combination of rebounding economic activity and a surging enchantment with mega-cap growth stocks is pressing investors to make an important tactical call: whether or not to exit some highfliers and shift assets to sectors with more cyclical exposure.
Profiting From Mighty Mites
One of the signature traits of the U.S. small cap market is the prevalence of money losing companies. A recent tally indicated that prior to Covid, 38% of small caps were reporting trailing year losses despite the widespread economic strength of 2019.
Why Value Failed—Top-Down & Bottom-Up Views
From a top-down view, since 2003, Value’s performance has been much more closely tied to various asset markets and macro drivers. From a bottom-up perspective, we believe the change in Value’s migration behavior might be the key to its failure. We believe macro tailwinds and positive surprises are both necessary for a true Value revival.
Factor Performance: Value Crushed
The selloff has served to amplify secular style-trends that were in place going into this debacle. Large Cap Growth has continued to outperform everything else, with the underperformance of Value stocks accelerating alongside market losses.
Valuation Dispersions Reach 2009 Levels
The recent market turmoil has only served to exacerbate equity style trends that have been in place for years, with Value, Small Caps, and High Beta all underperforming relative to Growth / Momentum, Large Cap, and Low Volatility, respectively.
The King Is Dead: A Global Chartbook
Last year we published a report titled Price to Book: The King is Dead (available on the Leuthold Research website) with the objective to better understand the decade-long struggle of the value style. Our findings showed that indexes based on the Price to Book ratio have indeed lagged since 2007 but that other measures of value performed significantly better until just recently.
The Case Of The Flipping Factors
Equity market themes have been boringly consistent of late; growth beating value, large beating small, and domestic beating international. In the factor world, Momentum and Low Volatility have been investor favorites for most of 2019 while Value resided in last place – the same old, same old. Then, something remarkable occurred on September 9th.
Horse Trading In The Factor Zoo
Smart beta ETFs have become an immensely popular investment tool, attracting billions of dollars in AUM by providing investors with targeted exposure to factors such as Value, Momentum and Quality. Characteristics such as these have been shown to generate alpha over time, and investors understandably wish to have focused positions in these return-generating styles.
Factor Performance: Momentum Saves The Day (Year); Value Is Awful
Momentum has made a furious comeback after a rough start to the year, posting an +11% spread in both May and August. Value continues to get crushed and there has been nowhere to hide: The pain is equally distributed between cheap and expensive, and it’s happening in every sector.
Value Turns Positive
Value finally performed well during July, turning in its best month of 2018 on a spread basis. While the factor category is still deep in negative territory for the year, almost 85% of its underperformance is coming from the worst quintile outperforming the universe; meaning Value has mostly struggled because of expensive stocks outperforming, not cheap stocks lagging.
Value Style’s 100-Year Flood
Value is the philosophical cornerstone of many legendary portfolio managers and is widely recognized as one of the most robust quantitative investment factors. Yet, despite its compelling conceptual merits and long-term record of superior returns, recent years’ underperformance of Value has lasted long enough to weigh on even 10-year performance records.
Muster Drill: To The Value Lifeboats
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While we’re not calling for an imminent market top, we are keeping a diligent watch from the crow’s nest for signs of a coming market correction.
Bridesmaid Strategy: Low P/E Sector: Annual Results
Table 5 shows annual performance results for the Cheapest Sector strategy under all four rebalancing frequencies, along with the lowest P/E sector for the annual version of the strategy.
Bridesmaid Strategy: A Value Alternative
For those not psychologically suited to a momentum approach, we’ve developed a contrarian sector allocation strategy that’s delivered even better long-term performance than the Bridesmaid approach.
Coming Attractions
With an abundance of year-end updates in this edition of Perception for the Professional, we plan to release the content for this “Of Special Interest” section separately in mid-January.
The Case Of The Disappearing Value Premium
Market history teaches us that investors behave differently in groups than they do as individuals.
Value Continues To Underperform
August factor performance was more of the same: Value underperforming everything else and extending its losing streak relative to Growth.
Dynamic Factor Investing: A Study In Value
Investment factors experience performance cycles just like every other asset and index. The Value factor is robust across definitions, as all eight versions produced positive excess returns under long/short and long-only methodologies.
Hate Momentum? Try This...
Not wanting to be seen as shameless shills for momentum investing, we’ve developed a contrarian alternative to the Bridesmaid sector approach that’s delivered even better long-term outperformance. It’s based on the holy grail of value investing: Low P/E.
Growth vs Value vs Cyclicals
Small Cap Growth stocks have gotten off to a rotten start in 2016—down almost 12%. On a relative basis, the segment has also been lagging Small Cap Value—underperforming by 9% since last July.
Foreign Stocks: The Value Trap Persists
Foreign stocks’ perpetual underperformance has opened up a valuation gap that should look extremely appealing to anyone with a horizon of more than two years. But proceed with caution.
Stick With What’s Working (Until It’s Not)
The year has been especially tough on managers who might have shared our cyclical worries over the stock market, but who’ve elected to stay fully invested via seemingly lower risk value approaches.
Quantitative Factor Performance: What Is Working?
For the third consecutive year (thus far), quantitative factors worked best within the Materials sector. Energy also saw success as the decline in oil hurt the same stocks as in 2014. Factors were least effective in Health Care and Telecom.
Growth vs Value vs Cyclicals
Growth Edges Out Value As Stocks Rebound
Growth / Value / Cyclicals
Despite the down market, Large Cap Growth expanded its YTD outperformance over Value—now almost 11%.
Value, Momentum, And The Stock Market Cycle
Conventional measures of market action, like breadth and industry leadership, point to the formation of a bull market top. Divergences abound.
Growth/Value/Cyclicals
Growth Showing No Mercy To Value
Growth vs Value vs Cyclicals
First Half Of 2015 All About Growth
Growth, Value, Cyclicals
Small Cap Growth stocks were the clear outperformers in May, up almost 4%. Growth stocks are still in favor when comparing YTD figures, with the performance gap especially prevalent in the Small and Large Cap spaces.
Paying Up For Stock Market “Leftovers”
It’s well known among market professionals that value investors are congenitally grumpy (for example, the retired keeper of our Undervalued & Unloved stock screen went by the internal nickname of “Eeyore.”) Worse yet, bad market conditions have lately combined with value managers’ bad genetics to make them an especially unhappy lot, even by their own dour standards.
Growth, Value, Cyclicals
Value stocks, recent underachievers, regained some lost ground in April. Large Cap Value was the month’s big winner—helped in large part by rallying energy firms. Large Cap Growth still leads YTD by more than 5%.
Growth, Value, Cyclicals
Growth Continues Run In Q1
Growth, Value, Cyclicals
Growth Stocks Dominating Value
Growth/Value/Cyclicals
Momentum Continues For Growth Stocks
Growth, Value, Cyclicals
Growth Strong In Second Half Of 2014