In their latest episode of the VALUE: After Hours podcast, Brewster, Taylor and Carlisle discussed value doing well in times of high inflation. Here is an excerpt from the episode:
TOBIAS: Is the value outdated?
Tobias: Brandes, they traced the beginning of it back to Pfizer Monday. They call it November 2020. I guess that’s when the jabs came out and the market rebounded, and they say there’s three reasons why it’s not over, because value tends to work at the start of an economic recovery. You have to think about it a bit. Inflation is good for value and value gaps are still very wide. The economic recovery, I guess, we’re going to debate that a bit. Maybe we’re relative to where we were in the middle of the pandemic, but that doesn’t seem very conducive to recovery at the moment. It’s not the tail of a bullet. I don’t know what we have right now. Descent depths, probably. [crosstalk]
Invoice: [crosstalk]for very green growth.
Jake: Green shoots, yeah. I remember those.
Bill: Just a green sprout.
TOBIAS: Yeah, no green shoots.
Tobias: I think the most interesting thing is the impact of inflation. So they do that quintile, the most expensive quintile minus the most undervalued quintile. This is the quintile 20% of the market, i.e. the market divided into fifths, and they compare it to the consumer price index year over year. This long short of value minus growth has tracked inflation quite well. Thus, it seems that in times of high inflation, the value is doing well. And they have a few reasons for the correlation. Financials tend to be in value. They are the most important component of value indices. They find that they do a little better in times of inflation.
Bill: What is the total return of the two in times of inflation?
TOBIAS: Well, they don’t have total return. They have– They are watching– [crosstalk]
Bill: One that’s less crappy.
Tobias: 12 inflationary periods since 1940 and they say that– [crosstalk]
Jack: Say that? OK.
Tobias: Value was positive in 83% of them, growth was positive in 75% of them. Outperformed S&P 500 value 92% of the time, growth 50% of the time, average value return 9.2%, growth 2.6%, then they then split into large and small, and and so on. The decade-long stagflation of the 1920s, 1940s, value stocks were mostly positive thanks to those at a reasonably good level, mostly outperforming GDP. If it is in fact inflationary, that could be a good thing. But I don’t know about the other points. I don’t know if we are in an economic recovery. It’s a long arc here.
Bill: Ah, maybe, I don’t know, I don’t think so.
Jake: Not having that. [laughs]
Bill: That wouldn’t be my assumption in the tightening cycle.
TOBIAS: Yeah, I feel like we’re diving here a little bit more than – I’ve said this for the past few weeks, but I think we’re finding out that we’ve been in a recession for six months, for about six months and I’ d say, “Yeah, we’ll backdate it a year.” So we’ve been in inflation for a year, but we won’t find it again for six months.
Jake: Now we all knew that from the start. [laughs]
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