Waiting for value stocks to end their lagging performance versus glitzy growth has become as exhausting and surreal as waiting for Godot. From 2007 through the summer of 2020, value stocks suffered through what Research Affiliates’ Rob Arnott and Cam Harvey describe as an “extraordinary span of underperformance,” where the performance differential has been noteworthy for both its length and strength.

Value stocks did enjoy brief periods of good returns during this drought, most notably when the recovery from the Great Recession began in 2009. In recent months, there has been some evidence and much speculation markets could witness a replay of a value resurgence. The bigger question is whether it is sustainable.

Benjamin Graham and David Dodd are generally credited with formally conceiving the concept of intrinsic value investing during the Great Depression. More than a half century later in 1993, two academics, Nobel laureate Eugene Fama and Kenneth French put a scientific veneer on the concept with their three-factor model, which caught the fancy of many financial advisors.

Advisors had good reason to buy into the theory. From 1981 through 2006, value stocks outperformed growth equities by an average of 2.3% annually, despite the boom in growth-style tech stocks during the late 1990s.

Since then, however, the story has taken a decidedly different turn. From January 2007 through November 10, 2020, the Russell 1000 Growth index returned 12.24% annually while the Russell 1000 Value index returned 5.96%, for an annual differential of almost 6.3%.

This has prompted researchers to engage in serious self-examination. Fama and French themselves reportedly are undertaking research to explore whether something in the financial economy has inherently changed.

The length of the business cycle has expanded, with only four recessions in the last four decades—and the most recent downturn this year was induced by government policy, not any specific weakness in the economic environment. Many believe we are in an age of disruption, with old industries like energy and retailing experiencing fundamental change.

The pandemic has only accelerated this upheaval. For example, online retailing was taking about a 1% share annually from brick-and-mortar stores in recent years. Yet in a single quarter this year it took a 4% share, or four years’ worth of market share capture in three months. At one point this fall, the market capitalization of green energy utility NextEra surpassed that of Exxon Mobil, the world’s largest company for much of the late 20th century. 2020 has not been kind to the old economy.

Historical Extremes
All this notwithstanding, smart students of markets like J.P. Morgan and Research Affiliates believe the time for an inflection point for value is now. “This is a better time to be a value investor than at any time in my lifetime,” said Arnott, Research Affiliates’ chairman, on a November 11 webcast sponsored by !Spark Network.

In a paper published this summer, Arnott and his colleagues found that the valuation gap stood at its historical extreme—the 100th percentile of relative valuations. If value returns to its historical discount versus growth, he maintains it could outperform by 7% annually for a sustained period. “When the train leaves the station, you’re going to regret missing out,” he warned.

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