Recession Strategies: Good Things Come in Small(cap) Packages

We’re already in a recession. Or, that’s what the pundits say. They may well be right. But what will you do about it? Will you follow common wisdom and seek the relative safety of large cap stocks? After all, large cap stocks are safer— right?

That’s what I had thought too, until I studied the S&P 500 and the Fama/French Small Cap Value benchmark portfolio in all nine recessions going back to 1950.

My study looked at time periods of one year and three year returns into a recession. Surprisingly, results show small cap value stocks to have both higher returns and lower risk than the S&P 500.

Here’s what happened in the one-year period from the start of all nine recessions. The S&P 500 declined three times. Yet in the same period, the Fama/French Small Cap Value benchmark portfolio was down only once.

Three years after the start of all nine recessions, the S&P 500 was under water one time. However, the Fama/French Small Cap Value benchmark portfolio fared much better by being firmly on dry land.

click to enlarge

One-year average return after the start of recessions in our study was only 2.95% for the S&P 500 while the Fama/French Small Cap Value benchmark portfolio returned a healthy 13.21%.

For the three-year period, the average return was 28.20% for the S&P 500 vs. 76.21% for the Fama/French Small Cap Value benchmark portfolio.

While the future may not be like the past, we think small is beautiful. And if common wisdom is all for investing in large cap stocks in these rocky times, you might just need some uncommon wisdom for your long-term investing success.

Disclosure: author is long IWN

Comments

[SchraderTrader]

Excellent research and post.