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What do you believe that is actually false? It is among the most basic investment questions anyone can ever ask. It is now one those expecting value stock leadership should ask themselves. All last quarter, pundits table-pounded that economically sensitive value stocks were leading the stock market upward, fueled by early bull market trends, economic re-openings and government stimulus. After celebrating Q1’s strong value performance, they were adamant on persistence—all quarter. But value lagged, badly. And that should be a wake-up call for investors. Let me explain.

Ever since 2020’s lightning-fast bear market, loads of data-driven investors hyped value leading the way up in a years-long advance. Why? As I explained here last September, “the data” say value leads early in bull markets. But for that normal reality, value needs bear markets’ archetypal long, slow grind downhill--culminating in late-stage panic. Last year’s bear market barely lasted a month—too short to reset the cycle. As I articulated here then, it acted instead like one hugely oversized bull market correction. Growth led before, during and after the downturn—a late-stage bull market feature.

The stock market is The Great Humiliator, or TGH. It craves humiliating as many investors as possible for as much money as possible for as long as possible.  TGH wants you, me…..and even your aged, infirm mother.  It fooled value fans last spring, summer and fall—badly.

When value didn’t lead off the lows, pundits doubled down, presuming their outlook was just early, not wrong. They cited vaccine rollouts, economic re-openings and government stimulus as why value would overtake growth. A brief countertrend starting November, as vaccine news broke, had them crowing. It continued in this year’s Q1 resumption—when world value stock returns crushed growth 9.6% to 0.2%—--convincing almost everyone value leadership was enduring.

But, TGH was hard at work—always is. Throughout Q2, pundits celebrated economically sensitive stocks’ huge prospects while believing value leadership persisted. But it didn’t.

World growth stocks smashed value last quarter, 10.9% to 4.7%, respectively. More broadly, world growth obliterated value since March 23, 2020’s low, rising 101.6% versus value’s 81.4%. Value rallies since then were countertrends—short-term head fakes for those buying into them.

Why didn’t reopening and vaccines spur value more? Surprises move markets the most. Vaccine-driven reopening mini-booms surprised almost no one. They were widely foreseen. Asian economies, which locked down earliest, boomed first—like China and Taiwan snapping back sharply from Q1 2020 drops the next quarter. This foretold the mid-2020 American re-opening that drove 2020 Q3 US GDP to soar 33.4% annualized. While precise re-opening magnitudes may have been hard for economists to predict, virtually all forecasters expected big rebounds. Its limited surprise power couldn’t materially sway stocks or change leadership trends for long.

And government stimulus? Won’t the global spending splurge and President Biden’s stimulus plans boost GDP and value stocks? No. As I showed you here at RealClearMarkets last month, there is no evidence so-called “stimulus” actually stimulates growth or inflation. The idea government largesse would boost value had a flaky foundation most pundits never bothered to test.

Even that gasping hope presumes stimulus actually passes! But slim congressional margins mean almost any dissent within Senate or House Democrats kills legislation. To moderate seeking Republican bipartisan support risks losing far left Democrats. Courting the far left means jeopardizing not only Republican support, but moderate Democrats’.  See the incredible shrinking infrastructure bill battles with any questions on that.

Any emergent legislation will move slowly, getting increasingly diluted in route. Surprise power?  Nope.  Evaporated by this process. With stimulus sidelined, where do value bulls go from there?

The answer, apparently, is Europe. Many value bulls argue its’ lagging economic recovery and lower valuations foreshadow a European re-opening pulsing Europe’s value stocks upward. This is TGH perfidy again. Markets are fully global and far too efficient for such obvious theories to work.

Soooo, it shouldn’t shock you European style trends mirror the world’s: European value stocks lagged European growth stocks, overall, in parallel to elsewhere, despite last fall’s and Q1’s value countertrend rallies. Nothing unique there. Rather than inspire big bargain hunts across the pond, Q2’s big value lag should raise questions for those who championed value stocks all quarter. Wisdom just might realize that, despite this bull market being just over a year old, it acts much older as I told you a year ago. Such old acting bull markets routinely favor huge, high-quality growth stocks.

Hence, note: value isn’t just about economic sensitivity. Value stocks are predominantly smaller, lower quality and—crucially—less liquid. In typical bear markets small and illiquid is exactly what you don’t want. Illiiquidity contributes to value’s big bear market lagging effect. It can compound late bear market plunges as margin calls and other urgent cash needs force panic selling. Plus, fleeing a bear market requires stocks you can sell easily and quickly. Tiny value stocks aren’t that.

So, for this bull market’s duration both risk and reward favor quality growth. Value’s enduring day will reign once again. For sure!  But likely not until the far side of an archetypal bear market. Don’t let TGH lure you into value’s illiquidity too soon.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here

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