It’s not easy to find a bull market in much of anything this year. 2022 has been an unusually challenging year for nearly all asset classes, including stocks, bonds, and real estate. Poor bond market performance stands out in particular – a result of high inflation and sharply rising interest rates that led to equity-like volatility and historic drawdowns in that asset class. As evidence-based investors, we know that diversifying stock investments by including short-term, high-quality bonds is an essential strategy for controlling risk in a portfolio. However, 2022 has also reminded us that nothing works in every period.
Within the broad equity universe, however, the declines have been very uneven. The worst performing sector this year has been U.S. large growth, especially the familiar technology companies that dominate financial media coverage. The Russell 1000 growth index, an index of U.S. large growth companies, has fallen more than 27% this year, on track for its worst calendar year performance since 2008. The more concentrated Nasdaq 100 index is down 33% year-to-date.
In contrast, value companies have outperformed (on a relative basis) by a wide margin, and this is true for both small and large capitalization stocks. The Russell 1000 value index is down by a far more modest 9.1% year-to-date. According to the Russell 1000 equity indexes, large value stocks have outperformed large growth stocks by 18.2% in 2022. This is the best calendar year outperformance for the value premium since 2000.
Small companies are outperforming large companies this year, as well. For the first 10 months of 2022, the S&P 600 index of small U.S. stocks outperformed the Russell 1000 index of large stocks by about 5½%. U.S. companies that fit both small and value categories are down a relatively modest 6% through October 31, far better than U.S. stocks overall. And finally, highly profitable companies are also having a good year on a relative basis.
While the factor performance differentials are large this year, they are still small compared to the early years of this century. In the first three years of the 2000s, value outperformed growth by a whopping 41%, and small outperformed large by almost as much (38.5%). Factor outperformance often arrives this way — in unpredictable and outsized bursts. Because of this pattern, investors can sometimes lose patience in these strategies that don’t “work” year in and year out.
According to academic research, we know that structuring portfolios to capture certain risk factors (size, value, and profitability) should lead to enhanced performance over time. This year, negative total figures across the board are obscuring an underlying market dynamic, namely, a strong bull market in the performance of these factors. When we dive deeper into the relative performance of various market segments, the “hidden” bull market of 2022 is finally revealed.