These Factors Outperform During Recessions

If you think growth or value stocks are the way to go, you’d better think again.

Illustration by II

Illustration by II

When a recession hits, it’s probably not a good idea to pin your hopes on growth or value.

According to the latest report from Investment Metrics, a Confluence company, growth and value factors have little impact on investment returns during periods of low consumer confidence, with value stocks losing an average of 1 basis point and growth stocks gaining an average of 1 basis point. The numbers are so close to zero that Alex Lustig, author of the report, concluded that neither factor offered any premiums during these periods. Meanwhile, the volatility factor lost 37 basis points, suggesting that highly volatile stocks have consistently underperformed during recessionary periods.

Quality and large-cap stocks, on the other hand, have outperformed their respective benchmarks when consumer confidence has plunged into recessionary territory. According to the report, companies with stronger balance sheets, more stable earnings, and higher margins — characteristics generally captured by the quality factor — beat the market by 21 basis points during recessions. IM’s size factor — which it defines as a measure of how much large-cap companies outperform smaller ones — also outran the benchmark by an average of 32 basis points. According to the report, these two factors outperformed due to their defensive nature.

Some quality and size sub-factors, such as return-on-equity, return-on-invested-capital, and sales-to-earnings ratio, have also generated significant alpha during periods of low consumer confidence, according to the report. Sub-factors are more detailed measurements of broader investing factors such as value, growth, and quality.

“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. He added that although value and quality factors overlap in many ways, their sub-factors might have different focuses. For example, value sub-factors such as book-to-price ratio reflect the intrinsic value of a company, while measures such as earnings growth stability and sales growth stability focus on the consistency and stability of a company’s earnings.


Similar factor performance results also showed up in a previous IM report focusing exclusively on Europe. Since 1996, Europe has experienced six recessionary periods, during which the quality and low-volatility factors served as robust sources of returns. And as was the case in the U.S., the value and growth factors both underperformed in these environments.

Investment Metrics used the Consumer Confidence Index, a measure developed by the Organization for Economic Cooperation and Development, to evaluate consumer sentiment. The index dropped to 96.5 in August, the lowest level since the CCI was launched by OECD in 1974.

“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.”