Institutional investors are often faced with the question of which factor strategies should be implemented in different phases of the economic cycle. In this paper, we examine how factors behave across economic cycles for the US market.
Over a long period, we find that Size and Value have anticipated subsequent inflections in GDP growth, while Quality has anticipated contractionary periods. The results are intuitive as Value and Size are more likely to do well when the outlook for the economy is good, whereas Quality provides protection when investors are more nervous about an economic decline. Momentum is found to contain little information about the macro-economy.
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