Value Stocks—Still Plenty of Fuel in the Tank

After a strong rally for value stocks in recent months, some investors are wondering if the rebound will continue. We think several forces are unfolding that should support a continued value resurgence as the world emerges from the ravages of the pandemic.

Value equities have been enjoying stardom after many tough years. The MSCI World Value Index has surged by 33.2% since November, outperforming growth stocks by a wide margin (Display). Investors have rediscovered the appeal of undervalued stocks, which often are facing controversy, in a diverse set of markets from Japan to Europe to the US. Since COVID-19 vaccines were unveiled in late 2020, hopes for an accelerated macroeconomic recovery fueled strong returns from cyclically sensitive sectors such as financials and energy, which are more heavily represented in value benchmarks.

Returns for value and growth stocks shown for 6 months through April 2021 in global markets, the US, Europe, Japan and emerging markets.

Value’s Weakness Is Unprecedented

So, what’s been driving the value recovery so far, and is there more to come? To answer that question, we need to first look back at equity market trends before the pandemic. It’s no secret that value stocks have had a rough ride in recent years. Yet the sheer scale of the underperformance simply has no precedent in modern market history.

In the past, value stocks delivered consistently strong returns over time. In the US market, where the longest data history is available, the cheapest 30% of stocks, based on price/book value, outperformed the most expensive 30% of stocks by an average of 4.1%, annualized on a 10-year rolling basis since 1936. But by the end of 2020, as the COVID-19 pandemic devastated economic growth, the trailing 10-year returns for the cheapest cohort of stocks had underperformed the most expensive stocks by about 8% (Display). This lost decade was by far the worst period on record for value, well beyond the poor performance seen during the internet bubble of 2000 and even the Great Depression of the 1930s.