A Word from Jeff: Are Value Stocks Finally Back In Vogue?

Are Value Stocks Finally Back In Vogue?The investment markets have been on a bit of a roller coaster since the September rally, with the continuing trade war, instability in the Middle East, and political drama with the impeachment inquiry all contributing to some sharp market bounces. The mid-October China deal has fueled some optimism, and even though it’s just a partial, baby-step agreement, it’s let some air out of the trade tension balloon, and given investors hope that things may be on the mend – finally for international trade.

This hope is sorely needed, as recession fears – and signs – have swept the globe, and even US economic data have looked pretty soft lately. So soft, in fact, that the Fed has hinted it may cut rates again, after already having done so a couple times this year.

Progress on the trade front is comforting even if it is incremental. While Mr. Trump had long maintained he wanted one big deal, taking it piecemeal is better than nothing, even if it’s probably being done for political reasons. With the US economy teetering on the tipping point of a recession path, the last thing Team Trump wants is a clearly slowing economy going into an election year. That “it’s the economy, stupid” mojo is what sunk George Bush (the 1st) in 1992, and Trump has danced close enough to the edge to risk that problem now.

Doing a partial deal will probably be better for China than a grand scheme, but probably better than the risk that China walks away to await the results of the 2020 election, and maybe gets a more accommodating team that might make more US concessions than Trump will have to make now.

In any event, the news is good for the market.

Interestingly, building recession fears seem to have jolted investors into the reality that earnings, dividend payouts, and fair value matters again.  About a month ago, Barron’s noted that the long-awaited shift from go-go growth stocks to good-deal value may finally be at hand:

“It used to be that stocks that got too expensive would eventually sell off, and that stocks that sold off too far would rebound. But over the past decade, pricey momentum stocks have gotten pricier, and value stocks have stained the carpet. Then, during the first three days of this past week, momentum stocks sold off by 10% and value stocks rallied 7%…that was one of the sharpest such three-day shifts in 30 years .”

For most study periods, value stocks have soundly beat the growth stocks that now seem to dominate the S&P 500, with value’s long term average annual returns something like 50% better than growth. The past ten or so years have seen value way underperform, but this may finally be changing. In the past, when performance leadership has shifted from growth to value, value has outperformed by a lot for a long, long time. Based on history, if and when this shift occurs again – and it may be happening now – the value bounce may be particularly valuable and powerful.

Given that Camarda’s investment methodology strongly favors value, this is good news, indeed. While we are proud of our investment methodology and performance over the past decade, if performance leadership is indeed finally shifting to value, we expect a truly outstanding decade ahead.

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