Growth & Value: Neck and Neck in 2021, Divergence in 2022
In 2021, growth and value stocks had closely matched returns with growth slightly ahead by year-end, but by early 2022, value stocks outperformed growth due to accelerating economic growth, persistent inflation, rising bond yields, and disappointing growth stock earnings, highlighting the shifting impact of key economic variables on investment styles.
In August 2021, the year-to-date performance of growth and value stocks was examined, noting that the Russell 3000 Growth Index and Russell 3000 Value Index were closely matched. Through July 31, the Growth Index was up 15.4% and the Value Index was up 16.9%. By the end of 2021, the Growth Index had pulled slightly ahead, finishing up 25% compared to the Value Index's 23% gain.
At that time, uncertainty around key economic variables—such as the durability of the recovery, the persistency of inflation, and the direction of bond yields—was believed to be responsible for the close performance between the indices. The outcome of these variables was expected to have a significant impact on the performance of growth versus value investing styles.
As of early 2022, the situation has changed. Five weeks into the new year, Growth and Value are no longer closely matched. The Russell 3000 Growth Index is down 10% year to date, while the Russell 3000 Value Index is down only 2%. The key economic variables appear to have shifted in favor of value investing.
The economy, although recently slowed by Omicron, grew nearly 7% in the fourth quarter and seems to be accelerating as COVID-19 case counts decline. Inflation has been higher and more persistent than expected, and the yield on the US 10-Year Note is at a two-plus year high. Value investing tends to perform well during periods of broad economic growth and rising inflation and yields. Additionally, several disappointing earnings reports from leading growth stocks have weighed on the Growth Index.
While growth has outperformed value over the past decade, value is currently experiencing stronger performance. This serves as a reminder of the benefits of maintaining broad equity exposure in an investment portfolio.