Value Does Well In Periods Of High Inflation

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In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Value Does Well In Periods Of High Inflation. Here’s a excerpt from the episode:

Tobias: Is the value run over?

Bill: Sure.

Tobias: Brandes, they traced the beginning of it to Pfizer Monday. They’re calling it in November 2020. I guess, that was when the jabs came out, and the market bounced, and they say there are three reasons why it’s not over, because value tends to work at the beginning of an economic recovery. Have to think about that one a little bit. Inflation is good for value and value spreads is still really wide. The economic recovery one, I guess, we’re going to be debating that a little bit. Maybe we’re relative to where we were in the middle of the pandemic, but it doesn’t look very recovery-ish to me at the moment. It’s not tail end of a ball. I don’t know what we have at the moment. Depths of heading down, probably. [crosstalk]

Bill: [crosstalk] for very green shoot.

Tobias: Yeah.

Jake: Green shoots, yeah. I remember those.

Bill: Just a green shoot.

Tobias: Yeah, no green shoots.

Jake: [laughs]

Tobias: I think the more interesting one is the impact of inflation. So, they do this quintile, mostly expensive quintile minus the most undervalued quintile. It’s the 20% of the market quintile is the market divided into fifths and they track it against the consumer price index year over year. That long short of value minus growth has tracked inflation pretty well. So, it seems that in periods of high inflation, value does well. And they’ve got some reasons for the correlation. Financials tend to be in value. They’re the largest component of the value indexes. They’re seeing that they do a little bit better in periods of inflation.

Bill: What’s the total return for both in periods of inflation?

Tobias: Well, they don’t have the total return. They’ve got– They look at– [crosstalk]

Bill: One that‘s less shitty.

Tobias: 12 inflationary periods since 1940 and they say that– [crosstalk]

Jake: Say that? Okay.

Tobias: Value was positive in 83% of them, growth was positive in 75% of them. Outperformed the S&P 500 value 92% of the time, growth 50% of the time, average return for value, 9.2%, growth, 2.6%, and then they further divided into large, and small, and so on. The stagflation by decade 1920s, 1940s, value stocks were mostly positive through those at a reasonably good clip, mostly outperforming GDP. If it is in fact inflationary that might be good. But I don’t know about the other points. I don’t know if we’re economic recovery. That’s a long bow here.

Bill: Ah, maybe, I don’t know, I don’t think so.

Jake: Not having that. [laughs]

Bill: It’d not be my guess going in the tightening cycle.

Tobias: Yeah, I feel we’re dipping here a little bit more than– I said this for the last few weeks, but I think we find out that we’ve been in a recession for six months, in about six months and I’ll say, “Yeah, we’ll backdate it for a year.” So, we’ve been in inflation for a year, but we don’t find that for another six months.

Jake: Now, we all knew it all along. [laughs]

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