Are Value Stocks A Safe Haven During Bear Markets?

Summary

• The current Growth/Value ratio is 1.32, between the valuation ratio at the beginning of the Dot-com bubble and the Recession of 1982.
• During both the bursting of the Dot-com bubble and the Recession of 1982 Value stocks significantly out-performed Growth stocks.
• Value stocks have out-performed Growth stocks during approximately 2/3 of the years since 1978 with lower volatility.

In this paper we will take a brief look at the performance of Value vs Growth stocks during bear markets since 1978. Since where we start from is one of the most import factors, we will order our analysis from the valuation of Wilshire Growth / Wilshire Value Index at the beginning of each pullback. The current Growth/Value ratio is 1.32, is between the valuation ratio at the beginning of the Dot-com bubble and the Recession of 1982. During both the bursting of the Dot-com bubble and the Recession of 1982 Value stocks significantly out-performed Growth stocks.

	Wilshire Growth/Value	Pull Back (S&P 500)	Beginning	Length (Months)
Dot-com Bubble	1.69	-49%	March 2000	31
Early 1980s Recession	1.19	-27%	November 1980	21
COVID Scare	1.11	-30%	February 2020	1
Black Monday	1.03	-34%	August 1987	3
Early 1990s Recession	1.02	-20%	July 1990	3
Housing Bubble	0.74	-56%	October 2007	17

The Dot-com bubble was the most brutal pull back for Growth stocks. It started with a Growth/Value ratio of around 1.69. During the overall market pull back from March 2000 to October 2002 the S&P 500 dropped by 49%. Growth stocks experienced a deeper bear market. Large-Cap, Mid-Cap, and Small-Cap Growth Stocks all dropped by a little over 60%. At the same time, Large-Cap Value stocks dropped by 23% and Mid and Small-Cap Value stocks did not notice that there was a bear market; both increasing by single digits.

The Bear Market during the Early 1980s recession started with a Growth/Value ratio of around 1.19. From November 1980 until August 1982 the S&P 500 dropped by around 27%. Due to differences in Small and Large-Cap stock performance, our Wilshire 5000 numbers do not show a bear market, but do show significant Value stock out-performance during this time period. Small-Cap, Mid-Cap, and Large-Cap Value stocks had a return of 12%, 1%, and -5% respectively. Mid-Cap, Small-Cap, and Large-Cap Growth stocks all under-performed at -11%, -15%, and -15% respectively.

A look at a shorter time period than the S&P 500 bear market does show a Wilshire 5000 bear market from June 1981 to July 1982. Again all Value stock categories out-perform all Growth stock categories. The best performance is by Small-Cap Value stocks at -7% and the worst by Small Cap Growth stocks at -27%.

The COVID scare of February 2020 only lasted a month and started with a modest Growth/Value ratio of around 1.11. During this pull back both Large-Cap Growth and Large-Cap Value stocks out-performed Mid and Small-Cap Stocks. The best performance went to Large-Cap Growth Stocks with a -33% pullback followed by Large-Cap Value with a -35% performance and the worst to Mid-Cap Value with a -46% performance.

The Black Monday drop from August to November 1987 started with a Growth/Value Ratio of around 1.03 and again saw a Value-Stock out-performance. The best performer was Large-Cap Value at -25% and the worst Small-Cap Growth at -35%. Large-Cap Growth and Small Cap-Value tied at -28%.

The brief pull back during mild 1990 recession started with a Growth/Value Ratio of around 1.02. The S&P 500 dropped by around 20% over the three months from July 1990 to October 1990. During this brief pullback from a near parity Growth/Value Ratio little correlation in the Value vs Growth stock category was shown with stock performance. Instead stock performance was determined by stock size. Large-Cap stocks, both Growth and Value, dropped by around 14%, Mid-Caps by 22% and Small-Caps by 27% for Value and 29% for Growth.

The last pull back on our list, occurred at the end of the Housing Bubble, and ran from October 2007 to March 2008. This pull back started with the Wilshire Growth/Value index at below parity: 0.74. Not surprisingly, this was the pull back where Growth stocks performed the best versus Value stocks. The top performers were Large and Mid-Cap Growth stocks at -49 and -54% respectively. Small-Cap Growth and all categories of Value stocks lost about 57% to 58%.

Value stocks have out-performed Growth stocks during 2/3 of the years since 1978 with lower volatility. Given that the current Wilshire Growth/Value ratio lies between the Dot-com bubble and the Recession of 1982, Value stocks appear to be the safest investment category at this point and the most likely type of security to lead to profits during the forcible future.

	Average Total Return	Annual Volatility*
Value	13.7%	15.7%
Growth	13.2	20.4

*Annual volatility is calculated as the standard deviation of the annual returns around the mean.

Examples of good low cost Value funds include the Invesco S&P 500 Pure Value ETF (RPV), the ishares Russell 2000 Value Index ETF (IWN), the Vanguard High Dividend Index Fund (VYM), the Vanguard High Dividend International Index Fund (VYMI), the Vanguard Mid-Cap Value Index (VOE), Vanguard Small-Cap Value Index Fund (VBR), and the Vanguard Value Index Fund (VTV).