Do value stocks do better in a recession?
A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn. We find that this conventional wisdom is false: empirical evidence shows that value stocks actually tend to outperform in recessions.
As a result, value investors thought we might have the wind at our backs for a while. But just as quickly, Russell Growth climbed back in 2023, outperforming the Russell Value Index by 23 percentage points, erasing Value's 2022 gains.
During a recession, you can expect stock prices to fall across the board. This happens for a number of reasons. For one, as we mentioned before, consumer confidence plummets during economic downturns. People are less likely to spend money – which means businesses make less profit.
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too. You can invest in precious metals in a few different ways.
Over the three-year trailing period, value stocks have also seen a 14% average annual return, far ahead of the 3.3% average annual return for growth-oriented names. During this period, small-value stocks led the Morningstar Style Box with an average annual return of 18.1%.
Although value stocks have lagged their growth counterparts over much of 2023, we believe the set up for 2024 and beyond looks promising. Historically, starting valuations have been a strong indicator of long-term future returns.
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
The average bear market cuts stock prices by 36% from peak to trough and these declines typically last over a year and a half. And stock market recoveries are even longer, taking almost two and half years on average.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
Should I sell stocks before recession?
When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses.
Many people who owned stocks that went down a lot would have been OK eventually, except they bought on margin and were ruined. The best performing investments during the Depression were government bonds (many corporations stopped paying interest on their bonds) and annuities.
- Care work.
- Financial planning.
- Beauty products.
- Beauty salons When times are tough, we still want to look good.
During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.
What are some examples of businesses that thrive in recession? Due to the elasticity of demand, recession-proof industries are usually in essential services, like health care, senior services, grocery stores, and maintenance, such as plumbing and electrical.
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term. Pro tip: Finding a second source of income — outside of your day job — will keep you extra prepared.
2024 could easily turn into the year that value stocks come out on top. Though “official” numbers say differently, there's a clear sense of unease as tech-heavy indices soar to all-time highs despite wide-ranging layoffs pointing to troubled economic conditions.
Value stocks are at least theoretically considered to have a lower level of risk and volatility associated with them because they are usually found among larger, more established companies. And even if they don't return to the target price that analysts or investors predict, they may still offer some capital growth.
Through Q1 2023 growth stocks have outpaced value stocks with the Russell 3000 Growth Index returning 13.85% compared to the 0.91% return for the Russell 3000 Value Index.
In addition to the path of monetary policy, the economy re-accelerating would be another positive catalyst for the sector. Many value stocks are economically sensitive and would see an increase in top and bottom-line numbers.
Why are value stocks underperforming?
Our analysis considers these arguments and concludes they have merit, but our research suggests that four key factors drove the underperformance of value and the outperformance of growth over the past decade: inflation, real interest rates, the corporate profits growth rate and equity market volatility.
For much of 2023, narrow market leadership (i.e., the Magnificent Seven stocks) and sizeable valuation gaps among equities widened the performance gap between large-cap growth and large-cap value stocks, with growth outperforming.
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Real estate.
- Cash and cash equivalents.
Stocks like Coca-Cola that offer stable dividends can be a good option in a recessionary environment, as dividends are a much more consistent source of income than capital appreciation, which ultimately depends on the vagaries of the market.
Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.