Value Stocks: Drawdown Mitigators or Aggravators?
The S&P 500 Index has been struggling with the 3,000 level for months. After taking out that number but stumbling in May, U.S. equities felt unstoppable, returning 7.1% in June and another 1.4% in July in USD. But the action in August and September was choppy. We are to the point where this market has done a lot of nothing since its January 2018 peak of 2,872. At 2,952, the S&P 500 looks toppy.
Figure 1: S&P 500
Value Stocks in Bulls and Bears
Going back to early 2007, Growth stocks have beaten Value stocks by about 4 percentage points a year. When did Value struggle? As far as WisdomTree is concerned, the trouble was in the up markets. While the bull runs witnessed an S&P 500 Index CAD median return of 15.2%, the WisdomTree U.S. High Dividend Index CAD’s median was about 3 percentage points lower (figure 2). The red ink shows the times our Index was below the S&P 500 Index CAD in those rallies.
Figure 2: The Bull Runs
But our dividend-weighting concepts are what put us on the map, so what gives? What gives is that we had better experiences during the rough patches. Figure 3 shows the significant stock market declines, and I also added 2019’s two small retracements for the reader’s edification. It seems the Russell Value methodology couldn’t hold up when the going got tough – when the phone started ringing. Our Index had a median decline of 4.3%, about 3 points better than the S&P 500 Index CAD’s typical decline of 7.6%.
Figure 3: The Bear Runs
Nothing is foolproof, and this is no secret sauce; note the 2008 and 2009 red ink, where our Indexes still owned the banks because they were late in slashing their dividends. But then again, we have close to a generation of history to go by, and the declines have been favourable to dividend-weighting. Of the 16 declines for the S&P 500 Index CAD, our Index held up better in 12 of them. Critically, this happened even though Value stocks, as defined by Russell, were dying on the vine. The red ink on the right attests to that.
So has Value been a drawdown mitigator or aggravator? Depends on your Index.