Jason Zweig’s “The Bull Market Isn’t As Big as You Think” in The Wall Street Journal nicely illustrates how the stock market may not be as disconnected from economic reality as many suspect. However, the piece misses the monetary elephant in the room.
Since the introduction of Quantitative Easing (QE), value investing only outperformed growth strategies during four brief moments – as measured by S&P Value and Growth Indexes (see http://www.centerforfinancialstability.org/oped/Value_Investing_063020.pdf).
Not surprisingly, the relative outperformance of value versus growth strategies coincided with periods when the Fed curtailed its injections of monetary liquidity: 1) the end of QE1, 2) end of QE2, 3) end of QE3, and 3) the period of quantitative tapering.
Although the monetary policy response to the Coronavirus was needed, unintended distortions should be acknowledged and incorporated into future actions.
The implication for value investors is clear. Monetary largess is wreaking havoc with the investment strategy. For the public and officials, the propagation of valuation distortions starve a wide spectrum of deserving companies and industries access to capital. This will surely minimize private sector driven growth going forward.
View the report
http://www.centerforfinancialstability.org/oped/Value_Investing_063020.pdf
