Alger: What is Recession Resistant?

July 15, 2022

According to Alger Management, many investors are contemplating a potential U.S. recession over the next year. To plan for a recession, investors may want to consider earnings sensitivity to economic activity. In other words, what is recession resistant? Alger comments by presenting a graph with accompanying explanations:

• Given that only three of the past 11 Fed tightenings have resulted in “soft landings” or the avoidance of recessions, it may be prudent to plan for a recession. But not all types of companies have similar fundamental sensitivity to the economic cycle.
• Over the past three recessions, growth stock earnings have held up much better than that of value stocks. We believe one reason is that changes in earnings are magnified relative to changes in revenue for value stocks because they have higher fixed operating costs and greater interest expense. Additionally, in our view, value stocks tend to operate in markets with more economic sensitivity, such as home building, consumer durables, capital goods, and banking,
  as compared to growth stocks which are propelled more by secular growth, which involves capturing market share by disrupting industries. For example, cloud computing is disrupting on-premises computing and medical advancements are constantly replacing older legacy health care products.
• While growth companies have recently borne the brunt of valuation multiple compression, history suggests that earnings reductions may hit value stocks harder.