Stocks fell last week due to renewed caution about the Federal Reserve’s next moves.
Acadian Asset Management recently published an interesting history of Value investing and what to expect from Value stocks ($VTV) going forward.
Acadian’s key points are:
1. For several years after the Global Financial Crisis of 2008, Growth companies delivered strong earnings growth and Growth stocks ($VUG) did well. This was fundamentally justified.
2. However, starting from 2017, investors started to over-extrapolate Growth stocks’ good performance: contrary to historical experience, they expected Growth companies would grow at high rates forever.
3. In 2020 during the COVID crisis, this over-extrapolation was taken to an extreme. A bubble in Growth stocks and related assets, such as cryptos ($BTC), formed.
4. In 2022, part of the bubble deflated as Value stocks beat Growth stocks by 20 percentage points.
5. However, the bubble still has not completely popped. Further downside likely remains for Growth stocks, while Value stocks remain attractive.
This history of Growth and Value stocks post the Global Financial Crisis has implications for evaluating track records. Records built by investing in Growth stocks and cryptos are unlikely to repeat. What matters for strategy selection is expected future returns, which are currently good for Value stocks, but tepid for the Growth and Defensive styles.