In the midst of the problems experienced with growth stocks over the past year and a half, investors have proclaimed that “value is back” – but a careful examination of stock returns over long periods shows that value never really went away.
The average value premium in the U.S. between 1966 and 2019 was a bit more than 5 per cent. Similarly, large global value stocks outperformed large global growth stocks by about 7 per cent over the 1985-2014 period, according to the Brandes Institute. If we are overly optimistic about growth stocks and we get good numbers, we sort of expected it. But if we are overly optimistic about growth stocks and we get bad numbers, we are very disappointed and react negatively. Similarly, if we are overly pessimistic about earnings growth and we get bad numbers we sort of expected it. But if we get good numbers, we are exuberant and react positively.
I also looked at the period 20 years prior to the study period , and the picture is similar, although notably, when the surprise was negative, I found the value premium was much larger in the later period. The significant increase of high tech and fast growth stocks in the more recent era helps explain the more dramatic reaction of the annual value premium to negative news.