Value Stocks Making a Comeback

Written by Luke Burgess
Posted August 22, 2018

It was a rocky start for value stocks this year.

As measured by the Vanguard Value ETF (NYSE: VTV) and iShares S&P 500 Value ETF (NYSE: IVE), value stocks lost as much as 12% beginning in January.

But since they bottomed out, both index funds have regained most of their losses and appear to be headed higher:

Vanguard Value ETF iShares S&P 500 Value ETF

Many financial commentators have attributed the downturn in value stocks at the beginning of this year to a larger shift in market attitude. They say the market has started to favor high-flying tech stocks and speculation and is also less interested in long-term value.

And that may be true to some extent...

Cryptocurrencies like Bitcoin had a stunning year in 2017. And there's no more debate from either the crypto perma-bulls or anti-crypto side. Everyone agrees that cryptocurrencies are speculative and are about as far from value investing principles as you can get.

Despite the drastic decline in prices since their peak last December, there are still many long-term holders and promoters beating the crypto drum. This is a good example of the levels of enthusiasm intensity that some speculative technologies can generate. Or it's an example of the human being as an opportunist.

But it's unlikely that value investors ever bought into the crypto fervor. They're never quick to jump on the latest technological craze. I'm almost always not.

I suspect there were few, if any, core value investors who dumped long-term holdings to buy Bitcoin. And the rush to speculative technologies like cryptocurrencies didn't significantly affect value stocks and won't for the foreseeable future.

Most commentators attribute the drop in value stocks at the beginning of this year to the growth rally in FAANG (Facebook, Apple, Amazon, Netflix, and Google) and other big-cap tech equities that have dominated recent mainstream media headlines. The mania in big tech ostensibly peaked with Apple's market cap topping $1 trillion. But Facebook and the Twittersphere are still abuzz with FAANG comments.

All this and more have led many market pundits to the conclusion that the market isn't interested in value investing anymore and instead favors higher-risk growth stocks. Some have even asked, “Is value investing dead?”

But even though growth rally may be capturing headlines, I suspect that the pullback in value stocks was actually due to short-term investors, speculators, and other weak hands being shaken out of the market. Rats are always the first to jump ship.

Value investing is certainly not dead. Nor is it dying.

What we're seeing is simply cyclical strength in the tech market at large. We've seen this before, and we'll see it again.

Thanks to recent earnings disappointments from companies like Facebook and Netflix, the technology ballyhoo is already beginning to cool down. And this has recently coincided with a bump in value stocks. But value investors are not reliant on a weaker performance of growth stocks.

Does all this mean that short-term investors and speculators are coming back to the market?

Maybe, but that's not really a bad thing right now.

After they built a stronger base over the first half of the year, value stocks could reach new highs by the end of the year as the cyclical strength in the tech market winds down. And that will shine the spotlight back on value. I expect to see near-term headlines reading, "Value Stocks Back From the Grave," and the like.

The first half of the year gave the value market a little turbulence. But it wasn't anything that value stocks couldn't handle. Bumps in the road are to be expected. But over the long-term, you'll eventually get to your destination.

Stay long value.

Good investing,

Luke Burgess Signature

Luke Burgess
Contributing Editor, Park Avenue Digest

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.

Report: 5 Simple Rules
for Investing in a Bear Market