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10 December 2020 / ASSET ALLOCATION VIEWPOINT

Leaning Into Value

Key Insights

  • We believe now is a good time for investors to consider a tilt toward value stocks, given promising vaccine news.
  • Despite potential near‑term volatility, value stocks could benefit from pent‑up demand as life normalizes post‑pandemic.

During the pandemic, value stocks—which are typically more sensitive to macroeconomics and interest rates—have significantly underperformed growth stocks. Technology companies, well suited for the stay‑at‑home world, dominate growth stocks and have driven market performance. However, promising news in recent weeks regarding multiple COVID-19 vaccine trials has led to a rally in value stocks, and we believe that now is a good time for investors to consider tilting their portfolios toward value.

For a variety of reasons, some investors may be apprehensive about value. Most notable is the fear that surging coronavirus cases in the U.S. could endanger the economic recovery. While the virus spread is a valid concern that could cause uncertainty and volatility in the near term, the development of vaccines could, in our view, normalize life in six to 12 months, dramatically improving the outlook for many companies impaired by the pandemic.

Given the recent rally in value stocks, investors might question the timing of a shift toward value. Although stocks hardest hit by the pandemic gained meaningfully on the day the trial results for the first vaccine were announced, we believe there is ample room for further improvement. As indicated in the chart below, value stocks still trail growth stocks by a significant margin in 2020 at the time of this writing.

Additionally, investors may not fully appreciate how impactful the vaccine distribution could be. Spending habits have been significantly muted during the pandemic, causing an increase in saving for many consumers who will be in a position to dramatically increase spending in 2021. This potential release of pent‑up demand—primarily aimed at areas that were largely abandoned during the pandemic—could, in our view, result in a very favorable environment for beaten-down value stocks.

Evaluating a Tilt to Value

Is it time to consider value stocks?

Evaluating a Tilt to Value

Past performance is not a reliable indicator of future performance.

Sources: (Left chart) Good Judgment, Inc. (Right chart) T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved; Russell. SeeAdditional Disclosures.

*Poll tracks: When will enough doses of FDA-approved COVID-19 vaccine(s) to inoculate 25 million people be distributed in the United States? Optimistic isdefined as before 3/31/2021. Pessimistic is defined as the cumulative of probabilities after 3/31/2021.

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

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