Value Investing: Improving the Odds

The yield curve may identify periods where the value premium is more attractive, according to research published by quant firm FactorResearch.

The article presents findings from a study using data from the Kenneth French library and the U.S. Federal Reserve showing that, since 1971, the “performance of the Value factor was negative when the yield curve was flattening:”

“We observe that the returns of the Value factor were negative when the yield curve was flattening and positive when steepening in the period between 1971 and 2019,” the article explains, adding, “On the contrary, when the yield curve flattens, investors tend to expect worsening economic conditions and are more likely to allocate to stocks associated with safety.”

The results suggest that “investors should avoid exposure to the Value factor when the yield curve flattens:”

The study findings also indicate that nearly all performance of the value factor stems from an environment when the yield curve was steepening and, further, that “allocating to cheap stocks when the yield curve was flattening was not an attractive strategy.”