Last year’s coronavirus bear market was punitive for all investment styles, including value and small cap stocks.
Owing to many companies in both groups being heavily focused on domestic operations, both factors are levered to what is now a resurgent U.S. economy. However, some investors remain jittery. That camp can lean toward domestic value fare over more volatile small caps.
“As we move toward normalization—buoyed by unprecedented fiscal and monetary stimulus—many economists expect U.S. and global GDP growth in 2021 to be the strongest in decades,” writes T. Rowe Price Capital Markets Strategist Tim Murray. “We think investors may want to consider opportunities in segments likely to benefit from economic growth, such as small cap and value stocks, with greater emphasis on the latter group.”
Traditionally, the primary value sectors are, in alphabetical order, energy, financial services, healthcare, materials, and real estate.
Value Is No Longer Vexing
Something else to consider is the pace of the value rebound following the COVID-19 bear market.
“In the initial phase of the pandemic, small cap and value stocks both underperformed, weighed down by lockdown restrictions and economic uncertainty. However, as optimism recovered, small cap stocks rebounded much faster than value stocks and have now considerably outpaced large cap stocks over the course of the pandemic,” adds Murray.
Value stocks may have more gas in their respective tanks because they recovered slower than small caps. Rising interest rates and warming inflation could be two more catalysts adding length to the value resurgence.
“Value stocks, on the other hand, have only begun to regain the ground they lost relative to growth in 2020. In recent years, value underperformance has been heavily influenced by falling interest rates, which created a headwind for financial stocks—a significant component of the value universe,” concludes Murray. “Recently, however, the environment appears to have turned more supportive, and value stocks could be boosted by rising interest rates, higher inflation, and positive economic growth.”
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