This brief summary of our paper “Value and Interest Rates” presents our findings on the effect of the interest rate environment on value’s prospects.
The interest rate environment –- the low level of interest rates, falling bond yields, or the flattening yield curve – has been blamed by some for value stocks’ sharp underperformance of growth stocks from 2017 to early 2020, exacerbating a longer period of lackluster performance dating back to the Global Financial Crisis for some value factors.
This summary highlights the ambiguous theoretical links between value and interest rates, reviews the varied historical patterns between value and different aspects of the rate environment, and presents a case study on value and rates in Q1 2020.
The full paper delves deeper and finds that despite some eye-catching patterns in recent data, particularly those related to changes in bond yields or the yield curve slope, the relationships between the interest rate environment and value are unstable and have limited economic significance. We conclude that the rate environment tells us little about value’s prospects, and that a change in that environment is not a necessary condition for value’s recovery.