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COMMENTARY 2/4

growth benchmark through mid-2013. More than half of that move occurred in late 2012 and early 2013. After the Global Financial Crisis, the Russell 3000 Value Index rose over 4% relative to the Russell 3000 Growth Index in the summer of 2009, but most of the rally took place over only one month. More recently, value has rallied since efficacy data for the first Covid-19 vaccine was released by Pfizer in early November, but almost all the gains were concentrated in a day or two of trading such that if we measured from November 10, the day after the Pfizer press release, there has been no value outperformance. The key point is that these value rallies occurred within a structural downtrend of underperformance that has seen the Russell 3000 Value Index performance cut more than in half relative to the Russell 3000 Growth Index over the past 15 years (see Figure 1). Recovery vs. the Long Term What about the trade into value equities once the economy begins to re-open, potentially causing a significant rebound in certain cyclical stocks that may occur once a vaccine is widely available? It’s true that the energy, industrials, and financial sectors’ earnings per

share (EPS) estimates for 2021 are still below their peak levels, implying a further recovery to “normalized” earnings, while tech sector earnings have already eclipsed prior peaks. Our point, however, is that cyclical rebounds historically have been short lived and overshadowed by substantial secular growth over the long term. Moreover, we believe that over the long term, the fundamentals of many subsectors that are predominate in value indexes or value investing styles may have new challenges triggered by the Covid-19 crisis that may not simply subside once we “return to normal” as the health care crisis ends. For example, the success of remote employment for many companies may have driven a new paradigm for business travel and work, one that could result in weaker fundamentals for airlines, hotels, convention industries and the real estate market for commercial and office space in many cities. This weakening of fundamentals could potentially extend well past a general economic recovery that could occur during the next two years. These industries all have high fixed costs: they are classic examples of “value” and cyclical stocks that were overly reliant on high-end business travelers or office tenants for sustaining their business models. But what if business travel is a thing of the past? Are trade shows held in mass convention

Figure 1 Russell 3000 Value / Russell 3000 Growth

120%

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90%

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40%

2006 2007 2008 2009 2010 2011

2012 2013 2014 2015 2016 2017

2018 2019 2020

Source:FactSet