Greetings!
What a difference a couple of weeks make in the markets. Well during the most recent flash crash, I mentioned it was absolutely not the time to sell or rethink you risk tolerance. Well the time has come...... if you were wishing you took less risk and had heartburn, the time is now to make changes. You need to be honest with yourself, markets are unpredictable and not efficient in short periods of time. So if the goal for your investment is less that 5 years make sure your portfolio is diversified and reflects the appropriate risk.
Risk & Goal Profile
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The Odd Couple: Recession and Value
Our process using our partner
SEI’s portfolios are designed with the belief that value is an alpha source. Simply put they seek to buy companies that have attractive valuations because they believe there is significant long-term potential that they will outperform a broad market benchmark such as the S&P 500 Index. In practice, this means their portfolios will have a strategic (long-term) bias toward value (and other alpha sources like momentum and stability) when compared to the portfolio’s benchmark.
You may be aware that a value bias has been quite painful over the past decade. It’s easy to find articles written by the financial press that declare value investing is dead. This isn’t the first time, nor will it be the last, that someone makes such a declaration—despite abundant academic research and historical data showing value investing has generated excess returns. Of course investors continually ask, “When will value outperform again? What will be the catalyst for this?” While, we certainly wouldn’t call a recessionary environment a perfect catalyst for value—and we believe trying to identify catalysts can be a counter-productive exercise anyway— our research does indicate that recessions have historically resulted in favorable environments for value investing.
Just like trying to predict catalysts,
attempting to time market events is a generally fruitless exercise.
In Exhibit 1, we compare the average historical outcomes of hypothetical value investments made at the time of a recessionary trough as well as three months before and after the trough. SEI's research, based on data from noted academic and author Ken French, indicates that no matter the timing of a value investment, it has typically generated significant out-performance (Exhibit 1) following a recessionary trough. As illustrated in Exhibit 2 for hypothetical value investments made three months before a trough, the results have been fairly persistent. One could argue that the optimal timing for a value investment would actually precedes the recessionary trough. Therefore, we contend that a strategic allocation to value—which, by its very nature precedes a recessionary trough—is an appropriate way to position in this type of environment. Equity markets are widely considered leading indicators and generally begin to recover before the economy improves, meaning investing early may be beneficial.
