May 2020 – Spread the Word: What’s New with Valuation Ratios

These have been challenging times for value stocks. Over the 10-year period ending March 31, 2020, the Fama/French US Value
Research Index returned an annualized 5.06%, well behind the 13.04% achieved by the Fama/French US Growth Research Index.
This performance divergence has resulted in a substantial widening of the price-to-book spread between value and growth stocks in the
US, as shown in Exhibit 1.

Extending this analysis to different markets and asset classes reveals further evidence of widening valuation spreads between value and growth. As we see in Exhibit 2, spreads among large cap stocks in the US, non-US developed, and emerging markets have all generally expanded over the past decade. This was also true for small cap stocks in the US and non-US developed markets, with only emerging markets small caps bucking the spread-widening trend.

What do we make of the valuation ratio data? A stock’s price represents the value of a company’s expected future cash flows discounted back to the present. So low valuations can result from low expectations of future cash flows, high discount rates, or a mix of the two. It’s not possible to cleanly isolate cash flow and discount rate effects from the data. But to the extent that low valuations reflect high discount rates, expected returns will be higher going forward.

Also in This Issue:
The Pre-Retiremet Checklist: Long Term Care
Federal and State Death Taxes: An Update for 2020
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles