Written by Nicolas Rabener



  • Economic cycles have a clear impact on factor performance
  • Some factors show pro-cyclical while others highlight anti-cyclical characteristics
  • Given that real GDP is not published in real-time, it is unlikely effective for factor selection

    Financial commentators frequently explain a rising stock market by the strength of the economy, which is rather intuitive. If the economy grows, then investors would expect public companies to grow their revenues and earnings, which should be reflected in rising stock prices. However, research by Dimson et al (2002) revealed that there is a modest negative correlation between long-run equity returns and economic growth by analysing multiple countries over a century. One explanation for this growth puzzle is that markets are forward-looking and current stock prices already reflect the economic growth. In factor investing economic cycles are often considered for factor selection and in this short research note we will analyse the relationship between equity factor returns and real GDP growth in the US.


    In this research report we initially focus on the Value, Size and Momentum factors from Fama-French, which are constructed as dollar-neutral long-short portfolios based on the top and bottom 10% of the US stock market. The data includes companies with small market capitalisations, excludes transaction costs and is available since 1926. We expand the factor set by the Low Volatility, Quality, Growth and Dividend Yield factors based on our own data, which is available since 2000. These are created via long-short beta-neutral portfolios and only include stocks with a market capitalisation of larger than $1 billion. Portfolios are rebalanced monthly and each transaction occurs costs of 10 basis points.

    Real GDP data is sourced from the Federal Reserve Bank of St. Louis and available since 1947. The chart below shows the number of quarters with positive and negative real GDP growth as well as accelerating and decelerating growth, which is defined as the last quarter divided by the average growth of the previous four quarters. We can observe that more than 85% of the quarters showed positive real GDP growth, highlighting the remarkable growth of the US economy, and that the split between acceleration and slowdown was equal.

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