Seasonality III: Fama-French factors

The Fama French HML factor exhibits remarkable seasonality:

HML-pres

(This is the highest R^2 of any factor or portfolio tested over any cycle length.)

On the 4 year (Presidential Cycle) value outperforms growth 1% per month in the first 2 years.  There is an abrupt ‘flip’ at the beginning of the cycle from growth to value.

HML-trace

This can be seen clearly in the full time series.  The arrows show how HML decreases over the cycle and flip from low to high as the new cycle starts (after the election).

Value outperformed growth 10% per *month* in the aftermath of the Technology Bubble (2001).

The blue trace is the market factor (right axis, log scale).  The red trace is the market factor excluding summer seasonals and economic recessions (St. Louis FED model).

Interestingly, cycles with the highest growth lead to recessions.  See the lowest arrows (most negative HML) in 1980, 2000 and 2008.   One possible explanation is that the most overheated markets need to correct further, resulting in economic contraction.

Next recession 2016?  Watch for HML approaching -10.

Further work could link HML with future GDP changes.

Advertisements

3 thoughts on “Seasonality III: Fama-French factors

  1. Pingback: Link between HML factor and future GDP growth | RRSP Strategy

  2. Pingback: Seasonality roundup: all timeframes | RRSP Strategy

  3. Pingback: US recessions, the Value Factor (HML) and current status | RRSP Strategy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s