Why do Value Stocks outperform Growth Stocks in the Aftermath of a Recession?

Hello, I dont understand why Value Stocks outperform Growth Stocks in the Aftermath of a Recession. I did the exercise called Pinacle Question 5 in the PORTFOLIO Management section on the CFA website:

We are currently in a recession but the economy will show signs of improvement in the coming month. Where should you invest?

  1. a trade that will steppen the yield curve ==> correct answer

  2. Rotate from SMall-cap stocks into large-cap stocks

  3. From Value into growth ==> Why is it not the correct answer?

Explanation from CFA says:

Morgan’s recommendations to implement a trade that steepens the yield curve in the midst of the recession is consistent with the economic cycle. The yield curve typically steepens when the economy is in recession. But given that value stocks are likely to outperform growth stocks and that small-cap stocks are likely to outperform large-cap stocks in the immediate aftermath of a recession, Morgan’s recommendation regarding growth equities is less likely to succeed. I dont understand the explanation in bold. Growth and Small cap stocks should outperform, respectively, Value and Large Caps. But here they say only Value will outperform growth? Why is that if the economy is going to improve soon…

I dont think the answer makes sense. If they say Value outperform growth then Large cap should outperform Small caps.

Thank you

Anyone please?

Turbo989 wonderfully explained this issue. Key is in market momentum and applying sector rotation in exact moment. IMO, it is a very risky strategy because portfolio manager should correctly predict economic cycle trends and market reversals.


Thanks! that’s perfect.