Value stocks left growth stocks in the dust in 2022, and Bank of America analyst Alex Makedon said Thursday that investors can expect more of the same in 2023.
While the SPDR S&P 500 ETF Trust SPY is on track to finish 2022 down nearly 20%, value stocks have held up relatively well. In fact, the Vanguard Value Index Fund ETF VTV is down just 4.3% year-to-date, At the same time, the Vanguard Growth Index Fund ETF VUG is down 33.4%, driven lower by rising interest rates.
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Reasons To Buy Value Stocks: Makedon listed at least five reasons investors should "stick with value" in 2023:
- Growth stocks remain overvalued compared to value stocks based on historical metrics.
- Value stocks remain underweighted among active managers.
- During periods of high inflation, value stocks have historically outperformed growth stocks for up to 12 months after inflation returns to normal levels.
- When inflation is high, value stocks have historically outperformed growth stocks for roughly a year after the Federal Reserve stops raising interest rates.
- Value stocks have outperformed during periods of interest rate volatility.
Makedon also said dividends may account for a larger share of returns in 2023.
"Dividends’ contribution to total returns lagged over the last decade, but returning to historical norms would imply that >50% of total returns will be from income vs. 14% today," he said.
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He anticipates high demand for dividend stocks considering many of them are undervalued and under-owned by institutional investors.
Benzinga's Take: If interest rates are responsible for value stock outperformance in 2022, then there's certainly no reason for investors to expect a recovery in 2023. The bond market is pricing in another 0.5% increase in interest rates in the first quarter and is not anticipating a rate cut until at least December 2023.
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