Are value stocks good in a 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.
During a recession, you can expect stock prices to fall across the board. This happens for a number of reasons. For one, as we mentioned before, consumer confidence plummets during economic downturns. People are less likely to spend money – which means businesses make less profit.
We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.
So, the Mag Seven dominated the market in 2023, but there's no guarantee ever that that will continue. And so, strategists say that having some exposure to value stocks makes sense, especially now.
Historically, the industries considered to be the most defensive and better placed to fare reasonably during recessions are utilities, health care, and consumer staples.
Equity Sectors
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
| Name | Price | Analyst Price Target |
|---|---|---|
| T AT&T | $16.12 | $20.89 (29.59% Upside) |
| INTC Intel | $35.68 | $44.21 (23.91% Upside) |
| MU Micron | $116.33 | $131.09 (12.69% Upside) |
| CSCO Cisco Systems | $47.79 | $53.73 (12.43% Upside) |
“We don't think the economic environment in 2024 is going to be good enough to support value outperformance,” LPL Financial chief equity strategist Jeff Buchbinder recently told Morningstar. “Remember, growth stocks tend to do better with lower interest rates and modest inflation environments.
| Company | 3-Year Sales Growth CAGR | Industry |
|---|---|---|
| Block (NYSE:SQ) | 16% | Digital payments |
| Etsy (NASDAQ:ETSY) | 10% | E-commerce |
| Nvidia (NASDAQ:NVDA) | 39% | Semiconductors |
| Netflix (NASDAQ:NFLX) | 7% | Streaming entertainment |
How are value stocks performing?
Current Valuations
While large value stocks are trading slightly above their 20-year average, mid-cap value stocks are trading slightly below their average, and small value stocks are trading at about a 14% discount to their average value.
Value stocks could be primed for a comeback, as investors look to broaden their portfolios beyond the Magnificent 7 group of megacap technology stocks—and recent economic data adds to the view that interest rates could stay higher for longer.
By investment style, small-value stocks are the most undervalued stocks right now, trading 26% below our fair value estimate. Meanwhile, large- and mid-cap growth stocks are 8% overvalued. By sector, industrials, technology, financial services, and consumer defensive stocks look most overvalued.
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Companies in the business of providing tools and materials for home improvement, maintenance, and repair projects are likely to see stable or even increasing demand during a recession. So do many appliance repair service people.
When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses.
Contrary to investor expectations, several growth stocks including Apple Inc. (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), and Netflix Inc. (NASDAQ:NFLX) grew during the 2008 recession, so investors don't have to ignore growth stocks to be conservative.
Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.
Tech Still Rules the Roost
Tech continues to dominate in 2024. As businesses expand digital capabilities, demand soars for everything from cybersecurity to cloud services and data analytics. 5G infrastructure is the backbone supporting much of this tech-fueled future, delivering internet speeds 10 times faster than 4G.
Do dividend stocks do well in a recession?
Dividend stocks are shares of a company that splits a portion of its profit with all its shareholders based on the number of shares each investor owns. Investing in companies with a strong track record of paying — and increasing — dividends can lead to stable cash flow even during recessions.
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. But the exact length of a recession is difficult to predict. In general, a recession lasts anywhere from six to 18 months.
| Symbol | Holdings | |
|---|---|---|
| Paramount Global Class B | PARA | 63,322,491 |
| Sirius XM Holdings Inc | SIRI | 40,243,058 |
| Snowflake Inc | SNOW | 6,125,376 |
| SPDR S&P 500 ETF Trust | SPY | 39,400 |
| Company (Ticker) | Forward P/E Ratio |
|---|---|
| Fidelity National Information Services, Inc. (FIS) | 15.3 |
| Intuitive Surgical, Inc. (ISRG) | 60.9 |
| The Kraft Heinz Company (KHC) | 12.2 |
| The Progressive Corporation (PGR) | 23.3 |
Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.
