Value Does Just Fine in Recessions

Executive Summary

A core concern for investors contemplating taking advantage of the incredible cheapness of deep value stocks today is the potential for a near-term 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. Value stocks have the charm of low expectations. No one is expecting all that much from them, so they have less to lose in an economic environment in which companies of all stripes wind up having a tough time.

Based on current valuations, deep value is priced to significantly outperform the rest of the market. Our analysis suggests that the prospect for deteriorating economic conditions in no way impairs this thesis.


Perhaps the most common question we have been getting lately when expressing our enthusiasm for value stocks is “But isn’t value just dialing into recession risk?” Answering this question is a bit complicated by the fact that there is no single agreed upon valuation metric to define value stocks. At GMO, when we build a valuation metric, we first try to remove accounting distortions that make measures such as reported book value and earnings problematic. Our standard “pure” value model, called Composite Value, makes those adjustments but no others. For building strategies such as Equity Dislocation 1 and U.S. and International Opportunistic Value 2 (strategies we have created recently to take advantage of today’s market extremes), we use value models that make further adjustments for company quality and growth.