The third quarter was strong for the markets with most major asset classes delivering positive returns. High growth stocks did particularly well, as the S&P 500 Growth Index gained 11.8% and outperformed the S&P 500 by 2.9%. The struggles for the value style continued during the quarter, and it once again underperformed the market.

History has shown that buying companies with low prices relative to the market has been a rewarded strategy. Value has outperformed growth since the late 1920s by an average of 3.2% per year in the United States. The outperformance is even more dramatic in other areas of the world (although their data does not go back as far).

Relative Price

Relative performance of value stocks vs. growth stocks (%) through 2019


Source Dimensional Fund Advisors (DFA). Past performance is no guarantee of future results. Actual returns may be lower For US Value minus Growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index. For developed international Value minus Growth: Fama/French International Value Index minus the Fama/French International Growth Index. For emerging markets value minus Growth: Fama/French Emerging Markets Value Index minus Fama/French Emerging Markets Growth Index.

While value has amassed a strong track record relative to growth, it has trailed over the last ten years. The chart below from Dimensional Fund Advisors (DFA) provides some context to the underperformance. Again, you can see that over the long-term, value has outperformed growth (figures differ from the chart above due to slightly different start/end dates). For the first seven years that value “lost” to growth, it returned 14.3% per year, which is actually stronger than its long-term gain of 12.8%. Growth happened to outperform its long-term average by a larger amount and exceeded value in the process. The most recent three years have been different. Growth has continued its stretch of excellent gains, nearly doubling its long-term average return over the past three years. Meanwhile, value has dramatically underperformed its long-term average, delivering a negative return during the recent period.

Growth Spurt

Annualized Compound Returns for Value versus growth, US Market

Source: Dimensional Fund Advisors (DFA). Value and growth stocks represented by the Fama/French Value Research Index and the Fama/French Growth Research Index, respectively.

Although value tends to beat growth over time, we know it does not beat it every time. Since 1926, value has outperformed growth over any given 1-year window roughly 59% of the time. If you stretch that window out to ten years, it has outperformed about 82% of the time. While investors should not be surprised that growth has now outperformed for an extended period, the degree to which it has outperformed is a bit shocking. The chart below from DFA illustrates the relative performance between value and growth on a 3-year rolling basis, ranked from worst to best. As you can see, the most recent 3-year period (as of June) was the worst, going back ninety years!

Back of the Pack

Rolling 3-year annualized return differences for value versus growth, US market, June 1929 – June 2020

Source: Dimensional Fund Advisors (DFA). Value and growth stocks represented by the Fama/French Value Research Index and the Fama/French Growth Research Index, respectively.

While the recent relative performance differential has been large, it is not exactly an outlier. There have been 21 other 3-year periods where the return difference was larger than 21.2%. It just so happens that value outperformed in every one of them. It’s important to understand that a bad stretch of relative performance does not mean value is dead. The economic rationale of generating higher returns by paying less upfront for future expected cash flows remains intact.

Sticking with an investment strategy like value after a prolonged period of underperformance is difficult. The fact that so many investors are incapable of doing so is one reason it has continued to work. If buying relatively cheap companies guaranteed higher returns, investors would rush into them and bid share prices up until they were no longer relatively cheap. Poof, no more value premium. Obviously, this has not been the case.

Value companies typically become cheap for a reason. These businesses may be facing unique challenges, or they could be in an industry that is under pressure. It’s uncomfortable to hold them. Many investors will prefer to buy the companies that have strong momentum. The companies everyone loves in the industries that everyone knows will change the world. Who wants to own Walmart and Berkshire when you could buy Tesla and Amazon?

Ultimately, the businesses that are cheap for a reason become hated to the point where they are too cheap. Conversely, the expectations heaped on the businesses that are the crowd favorites become unrealistic. This dislocation can build up slowly and last longer than people expect, but when market efficiency retakes the wheel, the correction can come quickly. This makes it both hard to predict in advance and essential to already be in your seat when it does.


  • Data published this morning by the Bureau of Labor Statistics showed that consumer inflation continued to increase during September. The headline figure increased 1.4% YoY, the fourth consecutive month of gains (though it gained at a slower pace than previous months). Stripping out the volatile food and energy components, the “core” CPI increased at 1.7% YoY. Prices for used vehicles were the biggest gainer, increasing by 6.7%. The federal government also announced that seniors receiving social security will receive a 1.3% increase to their benefits in 2021.
  • Earnings season for the third quarter kicks into full gear this week, with firms including JP Morgan, Citigroup, Johnson & Johnson, and Delta slated to report. According to Factset, Q3 earnings are expected to decline -20.5% YoY. Better than expected results would help lower equity valuations, which appear extended.
  • Other notable economic data prints this week include claims on Thursday, and retail sales, consumer sentiment and industrial production on Friday.


Source: MarketWatch


Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)



  • Earnings Season is a Critical Test for a Stock Market on the Road Back to a Record (CNBC)
  • IMF Says Global Downturn Will Be Less Severe Than Estimated in June (WSJ)
  • Mapped: America’s $2 Trillion Economic Drop, by State and Sector (Visual Capitalist)


  • Your Cash Earns Zip, Zilch, Nada. Don’t Make it Worse (Jason Zweig)
  • Don’t Take Personal Finance Advice From Billionaires (Ben Carlson)
  • Accountable to Darwin vs. Accountable to Newton (Morgan Housel)


  • Retailers Hope Amazon’s Prime Day on Tuesday Kicks Off Early Holiday Shopping Season (CNBC)
  • 2020 NFL Predictions (FiveThirtyEight)

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Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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