Bank of America says value stocks are 'broken' after worst 10-year performance against growth

Published Wed, Sep 9 20207:19 AM EDTUpdated Wed, Sep 9 20209:06 AM EDT

The performance of value stocks relative to growth names has been dismal over the past decade by historical standards, according to Bank of America. The firm said value had its worst-ever performance over a 10-year period when compared to growth. In that time span, the Russell 1000 Growth index has skyrocketed more than 300% while the Russell 1000 Value index is only up 107%. Value stocks are those with generally low multiples and stable fundamentals. Growth stocks are those with high growth expectations relative to the market. Value has also struggled in 2020 against growth, falling more than 27% on a relative basis as the U.S. struggles to recover from the shutdown sparked by the coronavirus pandemic. However, value's troubles against growth started long before this year, suggesting "value factor as traditionally understood is broken," global investment strategist Jared Woodard said in a note to clients. Woodard noted that "79% of the relative returns of value vs. growth" can be explained by looking at three factors: interest rates, inflation and the business cycle. Value is "intimately tied to economic growth & inflation, and as both of those have become more scarce, so too have returns on any assets linked to them." Since the 2008 financial crisis, the Federal Reserve has struggled to bring inflation to the central bank's 2% target as economic growth in the U.S. — and globally — has slowed down. That task became even harder after the pandemic hit as economic activity was virtually frozen due to lockdowns and strict social distancing measures. Last month, the Fed unveiled a new policy approach that would essentially let inflation run above 2% for a while before the central bank starts raising rates again. Woodard said that until inflation picks up and the economy starts to recover investors should expect growth stocks to continue outperforming. "There is no alternative in a world of shrinking returns on capital," he said. —CNBC's Michael Bloom contributed to this report.

A trader working at the New York Stock Exchange in New York, the United States.

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The performance of value stocks relative to growth names has been dismal over the past decade by historical standards, according to Bank of America.

The firm said value had its worst-ever performance over a 10-year period when compared to growth. In that time span, the Russell 1000 Growth index has skyrocketed more than 300% while the Russell 1000 Value index is only up 107%.

Value stocks are those with generally low multiples and stable fundamentals. Growth stocks are those with high growth expectations relative to the market.