That’s no accident — it matches value’s historical win percentage over comparable rolling periods. The average period of rising and falling rates in the data I looked at was 37 months, or just over three years. Since 1926, the longest record available, value has beaten growth 83% of the time over rolling three-year periods, matching its win percentage during alternating periods of rising and falling rates back to 1954.
It’s not entirely clear why value has been so dominant, but it probably has to do with the fact that value stocks are more volatile and boring than growth stocks, which hurts their appeal. Most people would rather own Nvidia Corp. and Tesla Inc. than JPMorgan Chase & Co. and Walmart Inc., for example.
That muted interest in value stocks, however, is a big advantage. Stock returns essentially come from three sources: dividend yield, earnings growth and change in valuation. By definition, value stocks have lower valuations and higher dividend yields, so they have a built-in edge relative to growth in two of the three drivers of return. Growth hasn’t delivered enough earnings expansion historically to overcome value’s advantages, in large part because many growth companies never live up to their promise.
Investors of a certain age will recall that for every Microsoft Corp. and Alphabet Inc. there were at least as many flameouts such as Pets.com and WorldCom. Today the choice is between, say, Tesla, which pays no dividend and trades at a staggering 80 times earnings, and Johnson & Johnson, which pays a 3% dividend for a more reasonable 15 times. For Tesla to win, it will have to produce spectacular earnings growth. And it might, but growth stocks as a whole rarely produce enough of it to outpace value.
That doesn’t mean growth stocks won’t have another great year in 2024 — anything can happen in a single year. But if they do, it will likely have little to do with interest rates.
Nir Kaissar is a Bloomberg Opinion columnist covering markets. He is the founder of Unison Advisors, an asset management firm.