New report unpacks why growth and value stocks are not the best bets
Growth and value factors have little bearing on investment returns during times of low consumer confidence, according to the most recent report from Investment Metrics.
Value stocks experience an average loss of 1 basis point and growth stocks experience an average gain of 1 basis point in performance during such periods.
Since the values are so close to zero, the report's author, Alex Lustig, came to the conclusion that neither component provided premiums during these times, reported Institutional Investor.
The volatility factor’s performance dropped by 37 basis points, indicating that equities with a high level of volatility have historically underperformed during recessions.
Read more: Why it's time to revisit low-volatility strategies
On the other hand, when consumer confidence fell into recessionary zone, quality and large-cap equities outperformed their respective benchmarks.
The study found that during recessions, businesses with better balance sheets, more consistent earnings, and higher margins – traits often described by the quality factor - outperformed the market by 21 basis points.
Additionally, IM's size factor, which it describes as a gauge of how much larger companies outperform smaller ones, outperformed the benchmark by an average of 32 basis points.
The paper claims that these two components outperformed because of their defensive nature.
In times of low consumer confidence, some quality and size sub-factors, including return-on-equity, return-on-invested-capital, and sales-to-earnings ratio, have also produced a sizable amount of alpha.
Investing characteristics like value, growth, and quality are examples of broad factors that have more specific assessments.
“Across many different time periods, the quality sub-factors are the ones that persistently outperformed. As for value and growth, it really depends on a lot more different sub-factors,” Lustig said.
Read more: The circle of life in factor investing
He continued by saying that while the value and quality aspects are closely related, their individual components may have distinct objectives.
For instance, value sub-factors like the book-to-price ratio indicate the underlying value of a company, whereas metrics like earnings growth stability and sales growth stability concentrate on the consistency and stability of a company's profitability.
A prior IM report that was solely focused on Europe likewise revealed similar factor performance outcomes.
The quality and low-volatility criteria have been reliable sources of returns during the six recessionary periods that Europe has seen since 1996.
Moreover, the value and growth variables also underperformed in these circumstances, just as they did in the United States.
“Low consumer confidence is a leading recession indicator,” according to the IM report. “Rapidly increasing costs of living due to inflation, higher interest rates, and global geopolitical uncertainty all indicate an upcoming recession.”
