For some investors, the tea leaf-reading exercise of Fed-watching may spill over into speculation about the impact of future interest rate changes on the value premium, which is commonly believed to be sensitive to interest rate activity. Recent relative performance of value stocks did nothing to dispel this belief. Over the period 2018–2020, the 10-year US Treasury yield fell by 1.47% while the average annual US value premium was -22.21%. The script flipped in 2021–2022, when a rise in rates of 2.95% was accompanied by an average annual value premium of 25.71%.
Drawing conclusions about the relation between value and interest rates using a few select data points is no more advisable than inferring the high correlation between Nicolas Cage movie releases and fatal pool accidents is causal.1 A more comprehensive view of the value premium shows little sensitivity to interest rate changes. The exhibit below indicates rising rate years have existed all over the distribution of value premium observations. There is no tendency for these periods to cluster among good (or bad) outcomes for value stocks. Trying to guess how value stocks will perform in response to future interest rate changes may be even less productive than sitting through a Cage movie.