There is the popular view that value relates to the interest rate environment. Rates have been low since the Great Financial Crisis, so it has been viewed as the culprit or at least a suspect for the poor performance of value. Nevertheless, the long-term empirical relationship between value, rates, and slope of the yield curve shows mixed results across time and measures of value.
These conclusions on the impact of rates on value are presented in a new paper, "Value and Interest Rates: Are Rates to Blame for Value's Torments?" by Thomas Maloney and Tobias Moskowitz. A strong relation between value and rates should be stable across time and across measures of value. Unfortunately, a stable statistical link was not found in their study. While there may be a strong short-term relationship, the behavior today is not consistent with value and rate relationships in the past. There is no consistent in the relationship between rates and different definitions of value. The same applies with the slope of the yield curve.
If the value of stocks is relation the discounting of cash flows, there should be a relationship between the discount rate, when cash flows are received and value. In general, growth stocks will likely have a long duration while value stocks could be viewed as a shorter duration equity, all else equal. This difference should be seen in their performance with respect to the level and slope of interest rates. Nevertheless, a financial distress argument would draw an alternative conclusion. The empirical numbers in this research do not show a clear relationship even after studying different value measures both in the US and internationally.
The tests do not show a statistically significant relationship with the level of short rates, long rates, or slope across a number of value measures. There is a relationship with changes in short rates and yield curve slope although not for all value measures. The same conclusions are drawn from international data. An analysis of the relationship through time shows that value is more rate sensitive now, but the relationship is not stable.
Looking for rates as the rationale for underperformance with value investing is not fruitful and other reasons for the poor value returns are necessary.
If the value of stocks is relation the discounting of cash flows, there should be a relationship between the discount rate, when cash flows are received and value. In general, growth stocks will likely have a long duration while value stocks could be viewed as a shorter duration equity, all else equal. This difference should be seen in their performance with respect to the level and slope of interest rates. Nevertheless, a financial distress argument would draw an alternative conclusion. The empirical numbers in this research do not show a clear relationship even after studying different value measures both in the US and internationally.
Looking for rates as the rationale for underperformance with value investing is not fruitful and other reasons for the poor value returns are necessary.
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