Value Stocks Having Some Time In The Sun
Elevated inflation and rising interest rates commanded much of the attention in 2022, with proclamations from Jerome H. Powell and his colleagues at the Federal Reserve often the catalyst for volatile gyrations in the prices of stocks. Of course, those moves were generally in the southern direction over the first three quarters of the year, as the S&P 500 entered into Bear Market territory in June before hitting its low for the year on October 12.
There were no awards for the losses on Value stocks over those nine months, but inexpensive equities held up much better. The Russell 3000 Value index suffered a return of negative 18.0% while its Growth counterpart skidded 30.6%, which is in keeping with the historical evidence for Value outperformance when inflation is high, when the Fed is tightening and when interest rates are moving up.
Value stocks continued to post better relative returns in the fourth quarter, with a solid rally taking place for inexpensively priced companies, even as struggles continued for many richly priced stocks. Such was the performance dispersion that the gap between the S&P 500’s Value and Growth components for 2022 ranked #2 since those indexes were created in 1996.
For the past 45 years, we at The Prudent Speculator have remained steadfast in our commitment to fishing in the pond of inexpensively priced stocks and we see little reason to depart from our longstanding practice of owning a broadly diversified set of stocks trading for discounted relative valuations in 2023.
I think this is supported by the weekly AAII Sentiment Survey, which suggests the Q4 rally did little to improve investor morale. In fact, the first tally of Bulls in 2023 came in at 20.3%, while the number of Bears hit 42.0%. Considering that there are typically more optimists than pessimists, the minus 21.5% Bull-Bear spread is especially notable as among the lowest in history.
Widely viewed as a contrarian measure, above-average market returns have historically followed below-average levels of optimism according to the survey, supporting the Wall Street maxim, “Be greedy when others are fearful and fearful when others are greedy.”
Stay tuned in the coming weeks as I share several themes my team and I think investors should keep in mind as we move through 2023.
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