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What Factor Should You Buy During a Market Correction?

Nov 27, 2018


  • Today, we take a look the four major factors driving US large-cap stocks: Momentum, Value, Growth and Low Volatility.
  • Our analysis considers the performance of these factors during periods when the S&P500 is negative.
  • At the end of this note, you will find a graph breaking-down of quarterly returns over the last decade for the S&P500, Rusell 1000 Momentum, Russell 1000 Value, Russell 1000 Growth, and Russell 1000 Low Volatility.
  • While conventional wisdom is to buy "cheap" stocks during market corrections since they will outperform on a "relative" basis, our analysis challenges this heuristic.
  • Over the past decade, the S&P 500 Index was negative in 12 quarters. The Russell Low Volatility Index outperformed the S&P 500 Index in 8 of those 12 quarters.
  • The relative return over those periods is 22.37%!
  • In comparison, the Russell Value Index and the Russell Momentum Index outperformed the S&P 500 Index in 6 quarters when it was negative while the Russell Growth Index only outperformed the S&P 500 Index in 5 quarters when the US benchmark was negative.
  • An interesting observation is that, while Russell Growth outperformed the least in terms of the number of periods, its relative return over those quarters is close to 15.0%, structurally outperforming Russell Momentum and Russell Value, which both have relative returns in the high single digits.
  • Next time when you hear a market commentator talk about a rotation into Value when the stock market gets expensive, just ignore him or her and buy low beta stocks? 


Source: Bloomberg