Given that we have entered a recession, should investors cut their equity allocation? Or move to larger stocks with good financial health? The answer is “no.”

After falling at an annual rate of 5.0% in the first quarter of 2020, the Bureau of Economic Analysis announced that U.S. GDP fell at an annual rate of 32.9% in the second quarter. Two consecutive quarters of negative growth is how recessions are generally defined by economists. However, the official arbiter of recessions is the National Bureau of Economic Research (NBER). It was on June 8th that the NBER declared the U.S. economy was in recession. The Business Cycle Dating Committee of the NBER determined that a peak in monthly economic activity occurred in the U.S. in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession.

One of the more frequently asked questions I receive is how factors perform in recessions. Thanks to my friend and co-author Andrew Berkin of Bridgeway Capital Management, we have the answers. The table shows how factors perform in expansions, recessions, pre-recessions and post-recessions.

During expansions, all factors are economically significant; Berkin found them to be statistically significant. However, the story is somewhat different during recessions: Both the market’s excess return and small size returns are now negative, and value returns are notably reduced. However, the other three factors show economically significant premiums, showing the benefits of diversification across factors.