What is Recession Resistant?
Many investors are contemplating a potential U.S. recession over the next year. To plan for a recession, investors may want to consider earnings sensitivity to economic activity. In other words, what is recession resistant?
Many investors are contemplating a potential U.S. recession over the next year. To plan for a recession, investors may want to consider earnings sensitivity to economic activity. In other words, what is recession resistant?
- Given that only three of the past 11 Fed tightenings have resulted in “soft landings” or the avoidance of recessions, it may be prudent to plan for a recession. But not all types of companies have similar fundamental sensitivity to the economic cycle.
- Over the past three recessions, growth stock earnings have held up much better than that of value stocks. We believe one reason is that changes in earnings are magnified relative to changes in revenue for value stocks because they have higher fixed operating costs and greater interest expense. Additionally, in our view, value stocks tend to operate in markets with more economic sensitivity, such as home building, consumer durables, capital goods, and banking, as compared to growth stocks which are propelled more by secular growth, which involves capturing market share by disrupting industries. For example, cloud computing is disrupting on-premises computing and medical advancements are constantly replacing older legacy health care products.
- While growth companies have recently borne the brunt of valuation multiple compression, history suggests that earnings reductions may hit value stocks harder.
The S&P 500 Growth Index measures the performance of growth stocks within the S&P 500 Index.
The S&P 500 Value Index measures the performance of value stocks within the S&P 500 Index.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of July 2022. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Local, regional or global events such as environmental or natural disasters, war, terrorism, pandemics, outbreaks of infectious diseases and similar public health threats, recessions, or other events could have a significant impact on investments. Foreign securities and Emerging Markets involve special risks including currency fluctuations, inefficient trading, political and economic instability, and increased volatility. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.
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