Article: What to Expect for Factor Performance During Low Consumer Confidence 

Alex Lustig | October 10, 2022

Consumer Confidence across developed markets such as the U.S., U.K., and Germany has declined significantly, reaching their lowest points since the measure started being recorded over fifty years ago1. At the dawn of 2022’s third quarter, both U.S. and European Central Banks have increased interest rates by an additional 75 bps2, with the Bank of England officially saying the U.K. is in a recession, raising rates by 50bps3.

The rate increases follow the largest global period of inflation in decades, exasperated in Europe due to astronomically high energy costs because of Russia’s economic war with the region. Low consumer confidence is a leading recession indicator, and rapidly increasing costs of living due to inflation, higher interest rates and global geopolitical uncertainty all indicate an upcoming recession.

To understand what to expect from a factor perspective in the future, we looked at how factors performed during periods of low consumer confidence. We found that low consumer confidence correlates with recessions and periods of a strong U.S. Dollar, so there are likely more impactful macroeconomic factors at play affecting factor performance than just consumer confidence. However, our findings lined up with previous articles: “Favorable Factors during E.U. Recessions” and “Strong Greenback points to Quality outperformance” where we concluded the following:

  • Quality and Size subfactors consistently provide alpha, specifically measures such as Return on Equity / Return on Invested Capital and Sales/Earnings Growth Stability 5Y, due to their defensive nature.
  • Value and Growth don’t offer any premiums, with Sales/Forecasted Growth subfactors particularly falling behind the market
  • High Volatility factors consistently underperform during recessionary periods

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The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar.

This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision. 

Investment Metrics, a Confluence company, does not provide investment advice and nothing in this document should be considered any form of advice. Investment Metrics accepts no liability whatsoever for any information provided or inferred in this document.


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