Correlation is not causation, as we should all know. But correlation is often a pretty good hint that some kind of causation is at work. So, what should we make of the apparent correlation between the performance of value stocks and bond yields? For the last few years, it’s certainly been the case that value has tended to beat growth when yields are rising, and underperform growth when yields are falling. For more than a decade, we’ve been accustomed to low bond yields and underperforming value stocks. Over the last four years, the relationship looks very close:
But it hasn’t always been this way, and Cliff Asness, the legendary founder of AQR Capital Management, has just published a paper designed to show that the recent correlation is a coincidence, or at best a phenomenon that will soon pass. Over a much longer time scale, this is how the “value” factor as defined by the finance professors Eugene Fama and Kenneth French has correlated over the last 90 years with the 10-year Treasury yield:
