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Is value back?

Here’s a few of the headlines I’ve seen over the past few weeks.

I never really bought the idea that value investing is dead, but I think it’s important to consider why value has underperformed growth and other strategies (such as momentum) over the past 10 or so years. We also need to take the current reversal in this trend with a grain of salt. Let’s maintain some perspective here, and see what may be going on with value stocks at the moment.

Coming out of the recession, the formula has been perfect for growth stocks. Low costs of borrowing, steady economic growth, and fairly low inflation (despite unprecedented monetary policy or “QE”) have given growth-oriented companies a clear advantage over traditional value stocks. In a predictable environment, there’s less to worry about companies ability to grow, so naturally, growth will outperform (all else equal).

With the introduction of various geopolitical situations such as US/China trade negotiations and Brexit (the list could go on) and indications of economic weakness (such as slowing GDP growth, inverted yield curve), investors are less certain about the direction of the US and global economy. With rates at historic lows globally and the Federal Reserve hinting that there’s unlikely to be continued easing, the uncertainty is only greater. With this in mind, investors are likely realizing they need to shift to safer bets. The safer bets are not only physical assets (real estate, gold, etc.), but also value stocks in which those real assets can also be acquired for fairly cheap.

In addition, tighter regulation and oversight on growth-oriented companies such as Facebook, Amazon, and Google may lead to lessened growth for them. These companies typically use their enormous cash piles to fund expansion, so regulation on current operations or expansion opportunities could pose a problem moving forward.

Value has markedly outperformed momentum since from the start of September

It’ll be interesting to see what happens throughout the rest of 2019. Whether or not this period of expansion is beginning to reverse is still uncertain and may be overhyped. Nonetheless, if value is poised to make a comeback, investors are going to have to pan the river for gold.

-Cole.

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