2021 should have been a great year for value stocks. S&P 500 profits grew by 50%, and inflation and economic growth surged as the economy rebounded from the pandemic-induced recession. The interest rate on the 10-year US Treasury bond rose from 0.9% at the start of the year to 1.5% by year end. Financials and energy stocks, two classic value sectors, handily outperformed the broader market. Value also began the year looking notably cheap relative to growth. Value stocks did produce strong returns in 2021, but given their cheapness relative to growth and the shift in the macro environment toward conditions that historically have favored value stocks, why did Russell 1000 Growth still beat the Russell 1000 Value 27.6% to 25.2%?
In the US large-cap space, value stocks charged out of the gate in 2021, besting their growth counterparts 17.4% to 6.0% through May. However, after May it was almost the reverse, with growth beating value 20% to 4.1% through the end of 2021, leading growth to edge out value once again for the year in the large-cap space. This was due mainly to the rise of the Delta and Omicron COVID variants and increased evidence of waning protection of vaccines against these new variants. This led to the return of COVID restrictions in some countries, a delay in the recovery of service sector spending, and weak US GDP growth in Q3. Indeed, the 10-year Treasury yield peaked early in the year at 1.75% and traded back down to 1.5% by year end-consistent with the relative rebound in growth stocks.
Looking beyond the performance of the large-cap indexes, the picture for value improves dramatically. Value destroyed growth within small caps, with Russell 2000 Value leaving Russell 2000 Growth in the dust, 28.3% to 2.8%. This divergence in the performance of growth/value in large caps versus small is reflective of a big divergence in the performance of high-quality, very profitable growth stocks, such as the FAANGM stocks-Facebook (now Meta) Apple, Amazon, Netflix, Google, Microsoft-and the more speculative growth stocks favored by investors in 2020, including Peloton and Zoom. FAANGM stocks posted a market-cap-weighted return of roughly 36% last year, versus -24% for The Ark Innovation ETF (ARKK) a proxy for the speculative growth names. Similarly, Zoom and Peloton fell 46% and 76% in 2021 after both surged roughly 400% in 2020, with the rally in "Stay-at-Home" stocks.
When looked at on a factor-performance basis, value also beat growth soundly last year. Using Citi's generic factors for the MSCI USA Index, which measure net the long-short performance of stocks in quintile 1 (attractive) versus quintile 5 (unattractive), the value factor was up 26.2% versus -7.9% for the growth factor.
What does all this portend for style performance in 2022? It's hard to know with great conviction as value has had false dawns, which have been followed by eventual growth resurgence. However, it's worth noting that value is off to a very strong start so far this year with the Russell 3000 Value Index outpacing the Russell Growth Index by 860 basis points in a down market-year-to-date through 1/21. Will value once again be strong out of the gate in 2022 only to see its outperformance fade as the year matures? Time will tell. However, it's a trend that we will be watching closely. Stay tuned. We will provide a progress report on this later in the year.