What Happens When Value Turns Into Momentum?

Last year was the worst one on record for value stocks. It’s no wonder that one of the questions that came up over and over again was, “Is value investing dead?”

You’ve probably noticed that value investing has been the opposite of dead for a while now. In fact, small value stocks have more than doubled since the low last year. Yes, I’m cherry-picking. Sue me. More interesting is the fact that they’re breaking out relative to growth stocks. We see this in large stocks too, but the effect is more pronounced here.

I asked Nick Maggiulli to do some data mining to see what happens when value stocks turn into momentum stocks. Admittedly we didn’t dig that deep, but from what we can tell, the answer is “not much.”

We looked back and forward 3, 6, and 12 months for both large and small growth and value and show the best fits below. When value starts to outperform growth, you can’t really say anything with a great deal of confidence about the future performance. Forward outperformance of value over growth does tend to persist, but I’m being very liberal with the English language here. It’s hardly predictive.

I suspect that the momentum that you might find, whether within growth or value, is not at the index level but rather at the individual security level.

I’m interested to see what happens when momentum strategies start scooping up energy and financials. It feels like we’re already there.