Do value stocks perform better when the yield curve gets steeper?

“Value stocks perform better when the yield curve gets steeper, meaning the difference between long- and short-term government bond yields widens. That correlation, nonexistent 10 years ago, has become more pronounced, especially since 2016, according to several investors and analysts.”

What do you think?

https://www.wsj.com/articles/new-link-between-stocks-bonds-shows-how-markets-have-changed-11575470950

The oxygen needed for value stocks to shine consists of frustrated expectations. Any value metric is reasonable or unreasonable depending on the expectations (re: future growth and/or future business risk) that make the ratio what it is: In terms of P/E = 1/(R-G), low P/E works if G expectations are too low and/or R expectations are too high. Conversely, high P/E causes pain when expectations for G prove excessing and/or when expectations for R are too low. Observations re: the long-term success of value are studies showing the historical shortcomings of investor expectations which tend, too often, to naively extrapolate the past and this is so whether the authors say so or not (and most don’t because many quants have no idea why tjhings are as they are; they only deal in what).

If a steepening yield curve is accompanied by frustrated expectations, value will work. If not, it won’t. If researchers argue that value has worked under these conditions, it would likely be because the business conditions that altered the yield curve also operated to mess up investment community expectations.

Value stocks perform better THAN WHAT when the yield curve gets steeper?

Marc is correct.

Value as represented be iShares Russell 1000 Value Index ETF (IWD) does not perform better when the yield curve gets steeper or flatter. Here is a link to a chart of the Forward Rate Ratio between 10- and 2-year Treasury yields. A positive slope of the graph represents steepening, and a negative slope indicates flattening of the yield curve.

https://imarketsignals.com/wp-content/uploads/2019/11/Fig-3.2-11-29-2019.png

On P123 you can test how IWD performs against VTI for the steepening and flattening periods. You will see that Value does not perform better during steepening periods, and not worse during flattenig periods…

They outperforms best when GDP is trending up and inflation goes down in rate of change terms, lots of cycnlicals and financials in the value space…
2016 is a good example…