Having been comprehensively outperformed by growth stocks for much of 2020, the outperformance of value in the fourth quarter continued in January.
The S&P 500 delivered returns of negative 1% in January in a tough month overall for U.S. equities, but investors backing the S&P 500 Enhanced Value index did best, achieving returns of 1.9%.
It marks a continuation in the change in fortunes for the trading strategy, which measures the performance of the 100 S&P 500 stocks with the highest average book value-to-price, earnings-to-price and sales-to-price.
Enhanced Value was the worst performing factor of those monitored by S&P Global Market Intelligence in 2020, falling 10.2% against a gain of 18.4% for the broader S&P 500. But late in the year the trading strategy's fortunes improved as vaccines were developed and the prospect of a prolonged economic recovery became more realistic.
Enhanced Value outperformed the benchmark in October, November and December returning negative 0.4% versus negative 2.7%, 19.8% versus 11.0% and 4.4% versus 3.8%, respectively.
"The return to value after a difficult decade has only just begun," Hugh Sergeant, head of value and recovery strategies at River and Mercantile, wrote in an emailed comment. "Recovery stocks are six months into what would normally be a 36-month positive cycle of profits recovering to pre-recession levels."
The economic downturn in 2020 weighed heavily on sectors such as financials and energy, which are the largest component of the Enhanced Value index falling by 1.7% and 33.7%, respectively. Financials make up 40% of Enhanced Value as opposed to just 10% of the broader S&P 500.
The index also missed out on IT stocks, which returned 43.9% in 2020, driven by the performance of the tech giants, which were largely unaffected by the weakness in the broader economy. The sector accounts for 25% of the benchmark but just 3% of the Enhanced Value index.
But in January, Enhanced Value benefited from its exposure to the energy and healthcare sectors, which returned 3.8% and 1.4%, respectively. And while the S&P 500 financials index returned negative 1.7%, the performance of financials is expected to improve.
"The current environment seems supportive for the big banks. Debt issuance has continued at a rapid clip, while heightened market volatility is likely helping out trading arms of banks, and the steepening yield curve should help improve profitability of lending," Chris Bennett, director, index investment strategy at S&P Dow Jones Indices, wrote in a market commentary.
The S&P 500 Buyback Index was the second-best performer in January returning 1.6%, ahead of the S&P 500 Quality, Value & Momentum multi-factor index, which returned 1%.
The S&P 500 Value index had a much less impressive month, returning negative 1.6%, than its enhanced version, hamstrung by its exposure to consumer staples, which shed 5.17% in January.
Having been the dominant trading strategies in 2020, the Growth and Momentum indexes delivered returned losses of 0.5% and 0.1%, respectively, as the tech giants took a pause after a breathless year.
The information technology sector returned negative 0.92% in January, but the key growth stocks of recent years may not be down for long.
"Long term, beyond the economic rebound and value rally we expect, this environment may prove to be once more supportive of growth stocks," wrote Joachim Klement, a strategist at Liberum.