Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – Will This Recovery Be Different?

An abundance of academic research shows the persistence of a value premium over time but that hasn’t brought much solace to investors who prefer undervalued stocks rather than growth stocks in recent years. For over a decade, growth investors have been high fiving each other while value investors have been left behind, scratching their heads.

In fact, for the 10-year period ending 3/31/2020, the S&P 500 Pure Growth TR Index outperformed its value counterpart by over 110%, the equivalent of 5% per year.

This run of growth over value, along with the unfortunate arrival of COVID-19, has brought additional kindling to the age-old debate of value or growth – which is better? This has even led some to question if the value premium still exists.

Despite many years of underperformance, it is worth noting that value did exhibit pockets of outperformance.

recent recoveries when value outperformed growth

Source: AAM | Bloomberg data

It’s particularly worth noting that value historically performs especially well in the early stages of a recovery. This has recently been true during the recoveries of both the Dot-com bubble and the 2008 Global Financial Crisis.

Not only did value stocks outperform growth stocks during these times, they did so in overwhelming fashion.

As you can see in chart 1.1, value and growth stocks moved in lockstep from the lows in October 2002 through the first two quarters of 2004. Investors who stuck with value were handsomely rewarded as value stocks returned 190% compared to 130% for growth stocks.

dot-com bubble recovery

Source: AAM | Bloomberg data

Even more impressive was the recovery after the Global Financial Crisis when value stocks outperformed growth stocks by a whopping 117%, or 17.16% annually, over the three-year recovery.

2008 global financial crisis recovery

Source: AAM | Bloomberg data

A simple explanation for this outperformance may lie in the fact that value stocks are perceived to be riskier. In the beginning stages of a recovery we often see investors’ risk appetite increase, which puts a premium on the attractively-priced “risky” value stocks.

Along the same line is the idea of mean reversion. Value investing, by definition, consists of buying stocks that look “cheap” based on a specific financial metric, such as low price-to-book ratio or low price-to-earnings (PE) ratio. When a recovery is in motion, and light can be seen at the end of the tunnel, “cheap” stocks often revert in price and come back in-line with their peers.

Value or Growth: Who’s taken the lead and where do we go from here?

The performance gap between value and growth stocks since the March 2020 lows hasn’t identified a clear winner and investors haven’t chosen their pony yet either. Between March 23 and April 17, both growth and value ETFs (exchange-traded funds) have seen impressive inflows, but neither are running away from the other – growth ETFs have brought in $8.9B and value ETFs are close behind with $6.8B, according to UBS data.

Growth investors often argue that the low-rate environment – which was so beneficial for growth stocks over the past decade – is still intact and growth will continue to carry the torch.

On the other hand, value investors may point to price-to-earning spreads between value and growth stocks and take comfort in the fact that value stocks performed well after reaching these levels in the past.

PE spread between value and growth

Source: AAM | Bloomberg data

Either way, with over 26.5 million Americans having already filed for unemployment, oil making unprecedented moves, and so much uncertainty in the marketplace, it’s hard to believe that we’ve already recouped 20% from the March 23 lows.

While we may or may not re-test those lows, we are still a long way from a full recovery and this may have the potential to be the opportunity value stocks need to make a comeback like they have so many times in the past.

As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.”

CRN: 2020-0406-8183R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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