GMO’s Inker Busts a Recession Investing Myth

Like most consumers, investors like a good deal — a stock trading at a steep discount to the company’s fundamental value. When a potential recession looms, however, they may question whether investing in these so-called deep value stocks makes sense.

Contrary to a common view, such companies aren’t shakier in a recession, according to a recent white paper from investment firm Grantham, Mayo, Van Otterloo & Co., co-founded by investment strategist Jeremy Grantham.

“A core concern for investors contemplating taking advantage of the incredible cheapness of deep value stocks today is the potential for a near-term recession. A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn,” wrote Ben Inker, who co-heads GMO’s Asset Allocation team.

“We find that this conventional wisdom is false: Empirical evidence shows that the value stocks actually tend to outperform in recessions. Value stocks have the charm of low expectations,” so have less to lose in an economic environment hitting companies across the spectrum, he added.

Since there’s no universally accepted definition for value stocks, there’s no one way to measure  exactly how well this category does in a downturn, according to Inker. But nuanced differences in those models don’t matter much, he added, because value “has done just fine across most recessions,” no matter the definition.

The COVID-19 downturn in 2020 marked the only recession in which value stocks performed poorly overall, and Inker suggested that situation was so unique, given the nationwide business shutdown, that it differed from a typical recession.

Since late 1969, every version of “value” except one (price-to-book value) performed better in an average recession month, including during the COVID downturn, than in a non-recession month, according to Inker.

That analysis covers “broad value,” and GMO has been contending lately that among U.S. equities, only deep value stocks are “really interestingly priced.” Investors “could imagine that the cheapest tail of the market dials more heavily into recession risk, but that simply isn’t the case,” he wrote.

Looking at performance for the cheapest 20% of stocks during recessions from 1969 through 2020, “apart from COVID, there isn’t a particular pattern of trouble across recessions for deep value,” Inker said.

“Let me emphasize this point,” he said. “Despite the common narrative about value in economic downturns, there is simply no empirical evidence to suggest value stocks consistently underperform during recessions.”

(Pictured: Ben Inker)