What’s Really Been Driving Value Stocks Higher?

What’s Really Been Driving Value Stocks Higher?
Theodora Lee Joseph, CFA

about 1 year ago1 min

Value stock returns have been dunking on growth stocks since the start of this year, but maybe not for the reasons you think. Sure, value investors would love to believe that the market is finally heading back to its fundamentals, learning to appreciate underpriced stocks with high dividend yields, but the truth is slightly more nuanced.

See, research from Acadian Asset Management shows that value’s outperformance is mostly because of all the long-energy-sector, short-tech sector bets out there, driven mostly by the Russia-Ukraine conflict and the rate-hike cycle. Case in point: the chart above shows how financial (light green shading) and energy (dark gray shading) stocks make up the lion’s share of a typical value portfolio – up to 67% – largely displacing industrials and real-estate companies. The story is similar in growth, where tech stocks have largely displaced other sectors like consumer staples.

All this may not seem like a big deal to you unless you realize that what’s happening in the financials and energy sectors can disproportionately impact your returns as a value investor. As Paul writes here, there’s an odd disconnect right now between crude oil prices and the energy sector’s stocks, which hints at downside price risks for shares. So if you’ve benefited so far from simply buying into a market-cap weighted value-factor ETF, beware: what’s driven performance thus far could very easily unwind.



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