Are U.S. Value Stocks Poised For A Reagan-Era Resurgence?

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Value stocks have outperformed both growth stocks and the broader market since the Nov. 8 election.

Value stocks saw similar gains in the two years following the 1980 election.

Could President-elect Trump’s economic proposals have a similar effect on value stocks as President Reagan’s?

By Nick Kalivas, Senior Equity Product Strategist, PowerShares

After some pre-election jitters, the U.S. equity markets appear to have embraced the victory of President-elect Donald Trump and Republican control of Congress. Between the day prior to the vote (Nov. 7) and Nov. 22, value stocks outperformed both growth stocks and the broader market. This was evidenced by the Russell 1000 Value Index, which rallied 4.8%, while the Russell 1000 Growth Index gained 2.8% and the broader market S&P 500 Index was up 3.6%.1

Over the course of his administration, President-elect Trump is expected to propose supply-side tax cuts, loosen business and financial regulations and lay out a plan to increase infrastructure spending. I believe these policy proposals, if enacted by Congress, could be constructive to value stocks. Value stocks typically trade at a discount relative to their peers based on valuation metrics like earnings-to-price, book-to-price and sales-to-price.

Financial stocks, which are typically seen as a value play, have already benefited from expectations of fiscal stimulus spending and reduced regulation: The S&P 500 Financials Index rallied 11.5% post-election through Nov. 22 and was priced at 1.27 times book value, with a forward price-to-earnings (P/E) ratio of 14.94, as of Nov. 22. Prior to the election on Nov. 7, this same index had a forward P/E ratio of 13.11.1

Value investing: A Reagan-Trump analog?

I believe there may be an analog between expectations surrounding President-elect Trump and what President Ronald Reagan envisioned in 1980. At that time, the economy was growing on a nominal basis, but inflation was so high that real (inflation-adjusted) gross domestic product turned negative at times and living standards were compromised.

When a bipartisan Congress pushed through the Economic Recovery Act of 1981 (also known as the Kemp-Roth tax bill), inflation was north of 13% and unemployment was at roughly 7.5%, and would remain so throughout much of 1981.1 The Kemp-Roth legislation ushered in a period of lower marginal tax rates and deregulation - policies that would form the centerpiece of President Reagan's economic agenda. President Reagan also favored increased military spending - not dissimilar to President-elect Trump's stated goals. This, too, helped prime the economic pump.

From October 1980 to October 1982, the Russell 1000 Value Index, which serves as a benchmark for value stocks, outpaced the Russell 1000 Growth index by nearly 16.5% and the Russell 1000 Index by 8.0%.1 The total return ratio of the growth and value indexes is depicted in the chart below. This occurred despite a brief recession in 1981 and 1982 and a 41% increase in the U.S. Dollar Index (which is notable because value stocks have generally performed well in weak-dollar environments). In addition, the 10-year Treasury yield spiked over 27% from the end of October 1980 to a peak of 15.84% in September 1981, before easing to 10.71% in October 1982.1

Source: Bloomberg L.P., Nov. 23, 2016

Source: Bloomberg L.P., Nov. 23, 2016. The total return ratio depicted here is the total return of Russell 1000 Value Index to Russell 1000 Growth Index.

Pick your level of value exposure

Investors who believe that the Trump administration's policies will be good for value stocks may want to explore strategies with exposure to the value factor.

The table below displays the sensitivity of three PowerShares ETFs to the value factor, which, in this case, is defined as a hypothetical portfolio made up of several key value metrics. Because of its construction, the Russell 1000 Value Index can also hold stocks that also screen growth. For this reason, it has less exposure to the value factor than PowerShares ETFs.

Value exposure PowerShares S&P 500 Value Portfolio ETF (SPVU) PowerShares Dynamic Large Cap Value Portfolio ETF (PWV) PowerShares Fundamental Pure Large Value Portfolio ETF (PXLV) Russell 1000 Value Index
1.23 0.60 0.54 0.26
Source: Bloomberg L.P., Nov. 23, 2016

With these three PowerShares ETFs, investors can choose their level of value exposure. Note, for example, that SPVU has twice the factor exposure of PWV and more than four times that of the Russell 1000 Value Index.

1 Source: Bloomberg L.P., as of Nov. 23, 2016

Important information

Blog header image: Bojan/

Past performance is no guarantee of future results.

Gross domestic product (GDP) is a broad indicator of a region's economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time. Inflation-adjusted GDP nets out the effects of inflation on this figure.

The Russell 1000® Index, a trademark/service mark of the Frank Russell Co., is an unmanaged index considered representative of large-cap stocks.

The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co., is an unmanaged index considered representative of large-cap growth stocks.

The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co., is an unmanaged index considered representative of large-cap value stocks.

The S&P 500® Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.

The U.S. Dollar Index ("dollar index") measures the value of the U.S. dollar relative to the majority of its most significant trading partners.

A 10-year U.S. Treasury note is a debt obligation issued by the U.S. government that matures in 10 years.

Book value is a company's total assets minus liabilities and intangible assets.

An earnings-to-price ratio is calculated by dividing the earnings per share of a company's common stock by the market price of the stock.

Forward price-to-earnings ratio measures a stock's valuation by dividing its share price by analyst consensus estimates of earnings per share.

Price-to-book ratio is calculated by dividing the market price of a stock by the book value per share.

Price-to-earnings ratio, also called multiple, measures a stock's valuation by dividing its share price by its earnings per share.

A sales-to-price ratio is calculated by dividing a company's market capitalization by the company's total sales over a trailing 12-month period.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes.

Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund's return may not match the return of the underlying index. The fund is subject to certain other risks.

Please see the current prospectus for more information regarding the risk associated with an investment in the fund.

Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the funds visit for prospectus/summary prospectus.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.


All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd.'s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

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