Growth, Value, and Recessions

Christian J. Galipeau

Christian J. Galipeau
Senior Market Strategist, 04/08/21


What equity investment style performs best as the economy enters a recession? What style is likely to lead as the economy exits a recession?

Studying market history may help provide a useful framework for investors as we navigate the recession of 2020. We looked back at the five recessions since 1980 as a guide.

In our research, we used the National Bureau of Economic Research (NBER) Recession Indicators. This time series, which has data going back to the end of 1854, interprets U.S. business cycle expansions and contractions and is often used to officially denote when the U.S. economy is in a recessionary or expansionary period.1

Using the common history between the NBER data and the launch of the Russell indices in January 1979, we can officially identify five pre-pandemic recessionary periods (excluding the current recession), which reached their low points in the following months:

  1. July, 1980
  2. November, 1982
  3. March, 1991
  4. November, 2001
  5. June, 2009

With those dates identified, we next looked at the performance of both the Russell 1000 Value and Russell 1000 Growth indices. For simplicity, performance of value and growth was assessed on a relative basis and denoted as Value/Growth. In charting the five individual cycles, the Value/Growth level was rebased to 100 at the official end of each recessionary period. (Note, as the index level represents relative values rather than absolute returns, a positive value does not equate with positive return performance.) The cumulative growth of Value/Growth is plotted starting 12 months prior to the official end of the recession and through the next 60 months (five years). This approach allows us to observe the historical relative performance of Value/Growth in the months leading up to and during the recessions as well as in the subsequent recoveries. Each of the individual cycles are displayed in Exhibit 1.


1 Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USREC, August 18, 2020.

Exhibit 1: Value Versus Growth cycles

We then built the archetypal path, which is the average of all the individual paths. We observed that value underperformed growth in the months leading up to and during a recession, as evidenced by the downward trending line. However, when the economy reached its NBER-defined low point of the recession, value outperformed growth by an average of 20% on a cumulative basis over five years, or 3.73% on an annualized basis. Exhibit 2 shows the archetypal path:

Exhibit 2: Value Versus Growth – archetypal path

Conclusion

While past performance does not guarantee future results, when we look back at the recessions of 1980, 1982, 1991, 2001, and 2009, growth tends to outperform value in the 12 months prior to a recession through to the low point of the recession. Keep in mind that the performance in each cycle varies, as there are differences in fundamental economic conditions during each recession. But these examples offer evidence that, as the economy exits a recession, value may be well-positioned to outperform growth for a long horizon, perhaps as long as five years.


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