It has been the best of times, it has been the worst of times…for growth and value…over the last decade. Since the end of the Great Financial Crisis (GFC), economic and market conditions have been generally favorable for US growth stocks.
Long duration equity strategies (growth, technology, certain private equity LBO strategies) appear vulnerable….
It is difficult to build a case that equity markets won’t contract in a slow-down. Since 1950, whenever CAPE valuations were above 20 and industrial production declined in the previous 12 months, the 12-month return of the stock market was -10.4%, with only 34% of periods having positive returns.
Interest income is attributable for all or most of bonds’ downside protection; therefore starting yields are critical. Bonds have traditionally been an important component of any portfolio derisking strategy but interest income has been a significantly larger piece of the return pie during economic downturns; whilst spread compression has been less significant.
Our analysis suggests that:
1. Low volatility strategies outperformed among publicly traded equities
2. Exposure to corporate default risk reduced bonds’ downside protection.