One Hot Economy, Two Burning Questions on Value and Income
The switch on the U.S. economy is readying to come fully “on,” more than a year after the global pandemic forced abrupt closures around the world and across industries.
The restart could be unlike any we’ve seen in nearly 40 years, says Tony DeSpirito, CIO of U.S. Fundamental Equities. It is being fueled by unprecedented fiscal and monetary policy, a productive vaccine program, pent-up demand for products and services after months of lockdown, and consumer balance sheets that are uniquely strong after a recession.
Whereas households typically need to repair their finances after an economic downturn, Mr. DeSpirito observes that balance sheets have improved throughout this crisis as individuals saved during lockdown and paid down debt. The upshot is more sidelined cash waiting to be unleashed.
All of this is putting major thrust behind the U.S. economy, raising some critical questions for forward-thinking investors.
Have recovery-fueled value stocks exhausted their outperformance potential?
Value stocks, as measured by the Russell 1000 Value Index, lagged in the throes of the crisis but have outperformed their growth counterparts by more than 15% since the announcement of the first effective vaccine in November of 2020. It’s been a big move in a short time, but Mr. DeSpirito believes the value run still has legs.
The experience in prior recessions shows that value has outperformed for two years coming out of the downturn. At only six months in and the economy yet to fully open, Mr. DeSpirito sees further runway, even as the return in this early recovery has matched the average of the 24 months following prior recessions. See the chart below.
Value historically has dominated post-recession
Value stocks’ excess return over broad index, 24 months after recession bear market