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By Mark Barnes, PhD, and Christine Haggerty, Global Investment Research
Amid the worst rout for US stocks in more than a decade, Value stocks showed impressive staying power, finishing in 2022 with far smaller losses than their Growth counterparts and the US market overall.
As we cover in our latest Russell US Indexes Spotlight report, the relative buoyancy of the US Value indexes last year came from their bigger tilts to more resilient inflation beneficiaries (notably Energy) and defensive stock groups (led by Telecom and Utilities) – as well as their lower exposures to the wreckage in pricier Tech and other growth stocks.
Value outperformance went into overdrive amid the broad market revival in Q4. Progress on the inflation front, perceptions of a softening in the Fed’s aggressive anti-inflation stance and the relaxation of China’s zero-Covid policies helped calm earlier global recession jitters. This, in turn, reignited favor for the cyclically sensitive sectors that comprise a bigger share of the Value indexes, particularly among large caps. The Russell 1000 Value climbed 12.4% in the quarter, while its small-cap peer rose 8.4%, outstripping the Russell 1000, Russell 2000 and the two Growth indexes by a wide margin.
Relative Russell US index returns (rebased)
Source: FTSE Russell. Data through December 31, 2022. Past performance is no guarantee to future results. Please see the end for important disclosures.
As a result of their Q4 rebounds, both large- and small-cap Value indexes regained much of the ground lost to their Growth cohorts in the Q3 summer rally, and significantly trimmed their losses for the year. The Russell 1000 Value cemented its lead across the flagship Russell US indexes for the year, falling 7.5% — half the loss of the Russell 2000 Value index and a quarter of damage endured by the two Growth benchmarks.
Russell US index series performances (TR %) – Fourth Quarter and Full-Year 2022
Source: FTSE Russell. Data as of December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Booming Energy stocks a big Value booster
Though Value’s outperformance versus Growth spanned most industries in Q4 and the full year, the gangbuster winning streak in Energy stocks played a major role in both periods.
Within large-caps, Value outstripped Growth in 9 of 11 industries in Q4, led by Consumer Discretionary, Materials and Energy. Value also held up better in all but Staples for the full year (10 of 11), particularly in Energy, Telecom & Discretionary.
Within small-caps, Value outpaced Growth in most industries in Q4 (7 of 11), with Materials, Industrials & Financials leading the charge. Value also fared better for the full year (9 of 11), led by Energy, Utilities and Financials.
Russell US style indexes industry total returns (%) – Full-year 2022
Source: FTSE Russell / Refinitiv. Based on Industry Classification Benchmark (ICB) data as of December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Value discount to Growth remains large vs history, despite recent outperformance
Forward 12-month price/earnings ratios have risen across the Russell US style indexes with the big price gains in Q4, more so for Russell 2000 Growth and Value (at 21.8 times and 14.3 times, respectively) than for their large-cap counterparts (27.5 and 17.6, respectively). However, all remain well below their year-ago levels, with both large- and small-cap Growth suffering far steeper contractions than the two Value indexes, reflecting the massive Growth-to-Value rotation over the past year.
Though Value typically trades significantly below Growth, the Value/Growth discount remains well above its 10-year average for the Russell 1000 style indexes, with or without factoring out the reopening-fueled multiple expansion in 2021 on pandemic-depressed earnings. In contrast, the Value/Growth discount is now roughly in line with the pre-pandemic average for the small-cap style indexes.
Forward 12-month price/earnings (P/E) ratios – Russell US style indexes
Source: FTSE Russell. Data as of December 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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