The Investment Scientist

Posts Tagged ‘fama and french

The recession is very likely over.” – Fed Chairman Bernanke on 9/15/09.

What does the fed chairman’s statement mean for stocks, if indeed the worst recession since 1929 is over? We don’t know for sure. We can, however, let history be our guide.

In this spirit, I studied the one-year and three-year returns of the S&P 500 Index and the Fama/French Small Cap Value Index coming out of a recession for the nine recessions since 1950.

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By the end of 2006, Small Cap Value stocks had completed a historical 7 year run of outperformance relative to Large Cap Growth stocks. According to Prof Kenneth French’s data library, during this 7 years, Large Cap Growth returned a total of -10.35% while Small Cap Value returned a total of 266%!

2007 however saw a drastic reversal. In the first 10 months alone, Large Cap Growth has outperformed Small Cap Value by a whopping 18%! If you are a Small Cap Value investor and you are nervous, you are not alone. How much longer and how much more will Small Cap Value uncerperform? To get a handle of these issues, it is helpful to get a historical perspective.

Based on the data on Fama/French benchmark portfolios in Prof. French’s data library, and by comparing the yearly performances of the Small Cap Value portfolio and the Large Cap Growth portfolio since 1960, I obtained the following results:

1. 75% of the years, Small Cap Value outperformed; 25% of the years, Large Cap Growth outperformed.

2. $1000 invested in Small Cap Value on 1/1/1960 would grow to $1.7mm on 12/31/2006! In comparison, $1000 invested in Large Cap Growth on 1/1/1960 would grow to only $66k.

3. There are 8 occurrences of Large Cap Growth outperformance. 3 lasted for one year, 3 lasted for two years and 2 lasted for 3 years.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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