http://www.efficientfrontier.com/ef/701/value.gifThe observation that higher interest rates are more harmful to growth than value stocks is not new, but there has been surprisingly little attention devoted to this in the growth-versus-value debate, particularly from a historical perspective.
In order to examine the problem, I took advantage of Ken French’s wonderful Web site and downloaded the HmL series (a familiar Fama-French acronym for "high-minus-low" book value), which goes back to July 1926. This series basically represents the return of the top third of stocks sorted on book/price, minus the return of the bottom third. In other words, the value-minus-growth return difference. A positive number signifies higher returns for value stocks, and vice versa. The simple plot of monthly inflation versus HmL is an eye-crossing scattergram, but the slope of HmL on inflation is clearly positive, with a t stat of 2.91 and a p value of .0037. So there is indeed a significant positive correlation between inflation and value return, albeit a very noisy one.
Based on Dr. Bernstein's analysis, it might be the case that the deflationary forces now in effect aren't going to be good for value stocks for the foreseeable future. And unless inflation comes roaring back soon, Value is Dead or at least Sleeping Soundly.The original Fama-French paper covered a period of very high inflation, the years 1963-1990, and consequently showed a robust value effect. Towards the end of that period, interest rates and inflation commenced a long and powerful decline, which continues to this day—just the sort of environment expected to favor growth stocks.