How do size and value tilts help investors get through recessions safely?
Earlier this week, we examined how domestic stocks, in general, perform during recessions. Today we’ll take a look at how the size and value premiums performed in 12 recessions, identified as such by the National Bureau of Economic Research, occurring in the post-World War II era. During that period, the average length of a recession was 11 months.
- While the size premium from 1926 through 2013 was 3.1 percent, during the 12 recessions since 1945, the average size premium was close to zero, at just 0.5 percent (total return).
- The size premium was positive in seven of the 12 recessions.
- The largest size premium occurred during the most recent recession, which began in December 2007 and ended in June 2009, when the premium was 12.1 percent.
- The most negative size premium occurred in the recession that began in December 1969 and ended in November 1970. During that period, the size premium was negative 16.4 percent.
- While the value premium from 1926 through 2013 was 4.9 percent, during the 12 recessions since 1945, the average value premium was 3.3 percent.
- The value premium was positive in just five of the 12 recessions.
- The largest value premium occurred during the recession that began in November 1973 and ended in March 1975. However, there were two other recessions, occurring from December 1969 to November 1970, and July 1981 to November 1982, when the value premium was in excess of 18 percent.
- The most negative value premium occurred in the recession that began in November 1948 and ended in October 1949.
Because the stock market is a leading indicator, it might also be instructive to look at the how the size and value factors performed in the six months prior to each recession.