White Paper

Asset
Asset Allocation

September 2019

Performance
and the
Business Cycle
A US
Case Study
Daniel Ung, CFA, CAIA, FRM
Head of Quantitative Research & Analysis,
SPDR ETF Portfolio Solutions

Shankar Abburu
Quantitative Research & Analysis,
SPDR ETF Portfolio Solutions
Contents
3 Introduction

4 Typical Phases of a Business Cycle

5 Case Study Methodology

8 Case Study Results

15 Conclusion

16 Appendix A: Sectors

18 Appendix B: Smart Beta

20 Appendix C: Fixed Income

Asset Performance and the Business Cycle A US Case Study 2

Introduction

Traditional theory suggests there are four stages of

the business cycle: recovery, expansion, slowdown
and contraction. In this paper, we provide a long-term
analysis of US business cycles and their impact on
sectors, smart beta factors and fixed income. We
believe the lessons gleaned can help to inform asset
allocation decisions.

Investment strategies to identify outperformers and laggards in different economic or market

phases are well-documented in financial literature and can encompass approaches that are
as diverse as price momentum and fundamental bottom-up analysis.

One of the most widely used and instinctive styles is to conduct asset allocation through
information garnered from the business cycle. On the surface, this approach makes sense
since business cycles exhibit characteristics that are likely to impact investment assets
differently. The idea that the market functions under recurring fluctuations depending on a
number of variables was formalised by Burns and Mitchell (1946).1

Burns and Mitchell posit that business cycles are a type of fluctuation found in the aggregate
economic activity of nations that organise their work mainly in business enterprises. Moreover,
they believe that a cycle consists of expansions occurring at about the same time in many
economic activities, followed by similarly general recessions, contractions and revivals, which
merge into the expansion phase of the next cycle.

Undeniably, each business cycle has its own particularities and no two business cycles are
ever identical, even though they may bear striking resemblance to one another as the rhythm
of cyclical fluctuations in the economy has tended to follow similar patterns. Performance
across asset classes similarly rotates in line with different phases of the business cycle. For
this reason, asset allocation with appropriate consideration to the business cycle may be
invaluable as part of a longer-term investment strategy.

Asset Performance and the Business Cycle A US Case Study 3

The Typical Phases and
Characteristics of a
Business Cycle

The business cycle represents the periodic fluctuations in economic activity, most notably
production, trade and general economic activity. The length of a business cycle is the period
of time containing a single boom and contraction in sequence. Customarily, there are four
distinct phases in a business cycle: recovery, expansion, slowdown and contraction.

• Recovery During the recovery phase, economic growth remains below trend but
rebounds sharply from the trough. Ordinarily, credit conditions have loosened and easy
monetary policy leads to strong growth in profit margins.

• Expansion Frequently the longest phase of the business cycle, the expansionary phase
enjoys a more moderate rate of growth than the recovery phase. In this part of the cycle,
economic activity gathers momentum as company profitability is healthy against the
backdrop of an accommodative, yet increasingly neutral, monetary policy.

• Slowdown A classic slowdown phase coincides with peak economic activity,

signifying that growth is decelerating even though it remains positive. In this phase, the
economy may start to overheat as capacity becomes more constrained, which leads
to inflationary pressures.

• Contraction In the contractionary phase, economic activity generally falls as corporate

profits decline, and the availability of credit turns scarcer, and monetary policy is also
anticipated to become more accommodative.

Asset Performance and the Business Cycle A US Case Study 4

 Case Study Methodology

Defining the Even though the business cycle is well understood as a concept, there is surprisingly little
Business Cycle consensus on how it should be defined. For the purpose of the analysis in this article, we
use the Conference Board’s Leading Economic Index (LEI) to judge the state of economic
activity in the US. It should be noted that the analysis is carried out through the use of leading
indicators because they are better predictors of economic conditions over the short run.
Research2 shows that the Conference Board LEI is useful to determine the near term (i.e. 6 to
9 months) direction of aggregate economic activity.

We prefer to use leading indicators as they are better thought of as a predictor of economic
conditions rather than a current barometer. Indeed, using this approach may produce results
that vary from those produced by other research on this topic, for example those that use
coincident indicators. However, we believe the forward-looking nature of the results provide
insights not gleaned from other approaches.

Economic Cycles are The Conference Board LEI comprises 10 economic indicators, spanning employment and
Defined Based on business orders to consumer expectations and financial conditions. Using a signal processing
technique known as an HP-filter (see Prescott and Hodrick [1997]3 for details), we extracted
Conference Board
the cyclical trend from monthly change of the LEI. The cyclical component was then classified
Leading Economic into four different regimes based on simple rules related to the slope of the trend line. The four
Indicators stages are as follows:

• Recovery The LEI index contracts at a decelerated pace

• Expansion The LEI Index expands at an accelerated pace
• Slowdown The LEI index expands at a decelerated pace
• Contraction The LEI contracts at an accelerated pace

Using this model, the US economy experienced roughly four major economic cycles during
the analysis period, with cycle lengths spanning six to ten years. Figure 1 shows the economic
regime based on our model.

Asset Performance and the Business Cycle A US Case Study 5

Figure 1
Regimes Based on
Conference Board
Leading Indicator

Conference Board Leading Indicator — US (MoM change)

5
4
3
2
1
0
-1
-2
-3
-4
-5
Jan 1982 1987 1991 1996 2000 2005 2010 2014 May
1978 2019

LEI HP-filtered Trend Expansion Slowdown Recovery Contraction

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data from January 1978 to May 2019.

Assessing To understand the performance of different strategies and asset classes over time, we studied
Performance of both the level of outperformance as well as its consistency on the basis of the model above.
Asset Classes over This is achieved by calculating the four metrics that are used as our evaluation criteria to
assess the performance of different indices.
Business Cycles

Category Metric Rationale

Level of Excess Return
and Consistency are
Level of Outperformance Average excess return This measure computes the
Both Key Criteria in difference in the monthly
Assessing Performance performance of an asset compared
to the benchmark.

It is indifferent to when a return

period begins during a phase.
Full period average excess This measure calculates the average
monthly performance of the compounded performance of
an asset class against the benchmark
in a particular business cycle phase.

It best captures the average

performance outcome on a “full
cycle” basis, because it accounts
for compounding.
Outperformance Consistency Average hit rate This ratio calculates the
frequency of an asset
outperforming the benchmark
in a given economic phase.
Full-period hit Rate This ratio calculates the frequency
of an asset outperforming the
benchmark on a full-cycle basis.

Source: State Street Global Advisors, as of 31 August 2019.

Asset Performance and the Business Cycle A US Case Study 6

 The four metrics are the principal criteria taken into consideration in the determination of an
asset’s performance rank. As a general rule, this means assets that score consistently well
across all four categories are ranked higher than assets that do well in only a few categories.
This analysis was carried out for equity sector, equity smart beta and fixed income indices.
Figure 2 shows the best performing indices in each category in different business cycles,
based on our evaluation criteria. In the forthcoming sections, we examine in detail the
performance of sectors, smart beta and fixed income indices.

Figure 2 Recovery Expansion Slowdown Contraction

Best-performing Sectors Materials Consumer Utilities Consumer
Assets in Different Discretionary Staples
Real Estate Real Estate
Business Cycles Industrials Heathcare
Technology
Technology Utilities
Smart Beta Small Cap Value Small Cap Low Volatility Low Volatility
Small Cap Value
Large Cap Value Quality Dividend Quality Dividend
Fixed Income High Yield High Yield High Yield Treasuries
Investment Grade Investment Grade Long-Dated Bonds

Growth Rate

Source: State Street Global Advisors, Bloomberg Finance L.P. The above diagram is for illustrative purposes only. Assets in
bold represent those that scored well across all evaluation criteria, whereas assets in normal typeface represent those that
scored well on the majority of the evaluation criteria.

Asset Performance and the Business Cycle A US Case Study 7

 Case Study Results

Sectors To understand how the performance of equity sectors changes over time, we have opted to
study the S&P 500 equity sectors across different business cycles since September 1989.

To start, we look at the recovery period, which is often the shortest phase in the cycle. In our
analysis, only 10% of the observations belong to this phase. In the recovery period, a number
of pro-cyclical sectors, such as technology and consumer discretionary, delivered a higher
return than the US market benchmark4 but they did not all beat the benchmark on a sustained
basis, with the exception of the materials sector (see Exhibit 1).

Materials Outperformed With over 70% of the sector in the chemical industry, the materials sector moves in
Strongly in Recovery conjunction with the business cycle and has a market beta of 1.08. The sector also
participates most in bullish markets compared with other sectors over the analysis period.
and Consumer Staples
Intuitively, this appears to make sense as a sharp upturn in economic activity is likely to
in Contraction lead to the outperformance of sectors with the highest exposure to economic growth.

Across our evaluation criteria, technology also did well. The sector attained a robust level of
excess return with some consistency, especially when judged from the perspective of the
entire cycle and its market beta was roughly 30% higher than the broader market. In addition,
the real estate sector beat expectations and returned more than the US market benchmark,
possibly buoyed by anticipations for consumer and corporate spending strength.

On the other hand, defensive sectors, most notably utilities, trailed the benchmark during this
period. This would be expected, as utilities are perceived to offer financial stability on account
of their near-monopolistic position in the market and, moreover, because consumer demand
is expected to remain fairly persistent across all stages of the cycle. Indeed, over 60%5 of the
sector consists of electric utilities that are heavily regulated by the Public Utility Commissions
in each state in the US, which prescribes how much each company can charge consumers as
well as its profit margin6. As a consequence, utilities are less responsive to the economic cycle.

The expansionary phase typically follows the recovery period. This part of the cycle is
usually one of the lengthier periods, representing 35% of the observations. As the economy
shifts beyond its initial stage of revival, and growth rates start to ease, the leadership of highly
cyclical assets also begins to taper. More sectors now benefit from the economic boom, and
this is demonstrated by the tightening of sector dispersion. Perhaps owing to this lack of
dispersion, three sectors — namely, consumer discretionary, industrials and technology
— stood out across all the evaluation criteria.

Considering solely the magnitude of excess return, technology and industrials companies
came out on top. In the technology sector, the largest industry is software (31%), followed by
services (26%) and hardware (19%). These industries are strongly geared to economic growth
and are highly reactive to equity up-markets since their bull beta ranges between 1.37 and
1.66.7 This seems logical as certain industries — namely software and hardware — typically
pick up momentum as companies gain more confidence in the stability of an economic
recovery and make sizeable capital expenditure investments.

Asset Performance and the Business Cycle A US Case Study 8

In a similar vein, industrials performed well in this stage of the cycle and attained healthy relative
returns — with remarkable levels of consistency. More than 70% of this sector comprises the
capital goods industry group, which invariably benefits from the demand surge in an environment
of sustained economic growth. The consumer discretionary sector has a similar tendency.

Conversely, counter-cyclical sectors (e.g. healthcare) trailed the benchmark. Half of the
healthcare sector is made up of pharmaceutical and biotech companies, which are less
affected by the business cycle as they maintain a substantial level of pricing power in the
US. Research shows that Americans, on average, spend 30% more on drugs than Canadians
and Europeans do8, simply because the American healthcare system is less centralised and
unlike in other countries, governments do not assume the role of price setter, thereby allowing
companies to charge exorbitant prices for both patented drugs and insurance premium9.

The slowdown phase often comes after the expansionary phase and accounts for 37% of
the observations. In this stage of the cycle, real estate performed well during the analysis
period. A possible reason for this may be that they are tied to economic growth, which is still
positive, albeit decelerating. Much of the return in this sector emanates from the income
generated by companies in the sector, which may help buffer against any losses that arise as
the contractionary phase draws nearer.

Towards the end of the cycle, investors may also brace themselves for an impending
economic slowdown and this, in turn, drives up the demand for utilities, which are more tied to
essential needs and are less economically sensitive. On the other hand, cyclical sectors such
as industrials will lag behind.

Contraction marks the final phase of the cycle (18% of observations). In our analysis, it is
the second shortest phase and is also the only phase where equities registered a negative
annualised return (-19.23%). As economic growth falters, sectors that are economically
sensitive fall out of favour, giving way to countercyclical sectors.

Among these sectors, consumer staples topped the table (see Figure 3) and produced a
consistently significant level of return throughout the entire recession phase. With a bear
beta of 0.61, the consumer staples sector has a low sensitivity to bear markets, highlighting
its defensive properties. Healthcare and utilities were also frequent outperformers, as
high dividend yield levels associated with these sectors helped them hold up relatively well
during recessions.

Asset Performance and the Business Cycle A US Case Study 9

Figure 3
Sector Performance
in the Recovery and
Contractionary Phases
Sector Performance
in Recovery Phase
3 Excess Return (%) Hit Cycle Rate (%) 100
90
2 1.73 1.76
80
1.17 1.02
0.72 0.68 70
1 0.42
0.34 0.55
0.25 60
0.06 0.17
0 50
-0.01 -0.16
-0.33 -0.17 40
-0.45
-1 -0.68
30
-1.30
-1.75 20
-2 -1.75
-1.85
10
-3 0
Services

Discretionary

Staples

Energy

Financials

Health Care

Industrials

Technology

Materials

Real Estate

Utilities
Communication

Consumer

Consumer

Average Excess Return (Monthly) versus Russell 3000 Full-Cycle Excess Return Full Period Hit Rate

Sector Performance in the

Contractionary Phases
3 Excess Return (%) Hit Cycle Rate (%) 100
2.39 90
2.08
2 1.73 1.70 1.70 1.81
1.54 1.53 80

0.87 70
1 0.72
60
0.16
0 50
-0.22
-0.55 -0.53 -0.40 40
-1 -0.59
-0.93 -0.92 -0.80 -0.88 30
-1.15
-1.48
20
-2
10
-3 0
Services

Discretionary

Staples

Energy

Financials

Health Care

Industrials

Technology

Materials

Real Estate

Utilities
Communication

Consumer

Consumer

Average Excess Return (Monthly) versus Russell 3000 Full-Cycle Excess Return Full Period Hit Rate

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data between September 1989 to May 2019, with the exception of “Real Estate”.
Monthly data between October 2001 to May 2019 for real estate. Please refer to Appendix A for all the sources used in the analysis.

Sector performance shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in
a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.

Asset Performance and the Business Cycle A US Case Study 10

Smart Beta Our analysis of smart beta strategies spans business cycles from August 1991 to the present.
In the recovery phase, when the economy begins its turnaround, value strategies, regardless
of market capitalisation, excelled among all the smart beta strategies under consideration
in this analysis (see Figure 2). In broad terms, value stocks are those that are priced beneath
their intrinsic value and can be expected to rebound strongly as the state of the economy
improves; indeed, the data illustrated this tendency. Predictably, low volatility, which
periodically rebalances to target the least volatile stocks, trailed the US benchmark10 as the
safer, more defensive stocks lose their attractiveness in a strong bull market.

During the expansionary part of the cycle, size, which encompasses both mid- and small-
cap stocks, delivered a positive excess return on both a monthly and a full-cycle basis, and
with a high hit rate. While small-caps outpaced mid-caps, the difference was somewhat
marginal over the study period. Defensive strategies, namely Quality Dividends and Low
Volatility, fell behind in an environment where economic growth was solid.

Quality Dividend and As growth prospects moderate in the slowdown phase, defensive strategies prospered. Of
Low Volatility Did Well note, quality dividends and low volatility delivered positive excess returns above the US
benchmark, with a reasonable level of consistency. In this phase, investors may start bracing
in Slowdown
themselves for a bearish market and begin to target strategies that have reduced sensitivity to
and Contraction the broader market. Low Volatility, with a bear beta of 0.68, falls into this category.

With bearish sentiment establishing itself firmly in the contractionary phase, the intensity
and consistency of outperformance rises for quality dividends and low volatility.11
Conversely, periods of positive but declining growth that relate to slowdowns and outright
contractions prove to be challenging environments for small- and mid-cap companies.

Asset Performance and the Business Cycle A US Case Study 11

 Hit Rate (%)
Figure 4 1.5 Excess Return (%) 100
Smart Beta 1.12 1.06 90
Performance in 1.0
80
the Recovery and 0.56
0.51 0.49 0.45 70
contractionary 0.5
0.31 0.21 60
Phases 0.10
Smart Beta 0.0 50
Performance in the -0.11 -0.12 40
Recovery Phase -0.5
30
20
-1.0
-1.06 10
-1.5 0
Low Quality Mid Cap Small Large Cap Small Cap
Volatility Dividend Cap Value Value

 Average Excess Return (Monthly) versus Russell 3000

 Average Cycle Excess Returns (Monthly)
 Hit % (% of Cycles within Regime Outperforming the Benchmark)

Smart Beta 2.0 Excess Return (%) Hit Rate (%) 100
Performance in 1.53 1.51 90
1.5 1.31
the contractionary 1.22
80
Phase 1.0
70
0.5 0.37
60
0.08
0.0 50
-0.01
-0.5 40
-0.49 -0.51 -0.46
30
-1.0
-1.21 20
-1.5 10
-1.80
-2.0 0
Low Quality Mid Cap Small Large Cap Small Cap
Volatility Dividend Cap Value Value

 Average Excess Return (Monthly) versus Russell 3000

 Average Cycle Excess Returns (Monthly)
 Hit % (% of Cycles within Regime Outperforming the Benchmark)

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data between September 1989 to May 2019, with
the exception of Quality Dividend, Small Cap Value and Large Cap Value. Monthly Data between December 1999 to May
2019 for “Quality Dividend”. Monthly Data between November 1998 to May 2019 for “Large Cap Value” and monthly data
between June 2006 to May 2019 for “small cap value”. Please refer to Appendix B for all the sources used in the analysis.

Smart beta performance shown are as of the date indicated and are subject to change. This information should not be
considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether
the sectors or securities shown will be profitable in the future.

Asset Performance and the Business Cycle A US Case Study 12

Fixed Income Finally, we study the performance of bond strategies vis a vis their benchmark12 across
business cycles from February 1992. In the fixed income space, high yield corporate bonds
led the pack during the recovery phase, a period when the recovery starts to revive. During
this period, high yield bond emissions are usually expected to recover from their lows in the
recessionary phase and company defaults are less common.

As a consequence, they tend to be more geared to a positive economic outlook and corporate
earnings than changes in interest rates. Besides, they often have low duration because
they are typically issued either with short maturities or are callable after a short period of
time. Their characteristics are more closely akin to equities in many respects, though with
diminished volatility. This is because they generate much of their return from income and they
will be reimbursed earlier than equities, in the event of issuer debt default, for instance.

Our analysis shows that the performance of other credit sensitive instruments, such as
investment grade corporate bonds, also trumped that of many other types of fixed income
instruments for the same reason, because they are also exposed to credit risk, albeit to a
lesser degree.

Both types of credit-sensitive bonds and, in particular, high yield bonds, continued to
eclipse other types of fixed income instruments in expansionary periods, even if the average
level of return they generated had gone down. Less economically sensitive bonds, notably
government bonds, performed poorly.

High Yield and Long- As the economy moves to the slowdown phase, we saw a reversal of fortune. More interest-
Dated Bonds Excelled rate sensitive instruments, most notably longer-dated government bonds and investment
grade corporate bonds, reigned supreme. High yield bonds were hit hard in this environment,
in Slowdown
even though they still delivered a positive average return. This contrasts starkly with the
contractionary phase, when both high yield and investment grade bonds faltered and
government bonds were the only category of bonds that achieved a positive return.

Asset Performance and the Business Cycle A US Case Study 13

Figure 5
Fixed Income Performance
in the recovery and
contractionary phases
Fixed Income Performance
in the Recovery Phase
2 Excess Return (%) Hit Rate (%) 100
1.73

1.13
1.04
1 0.97
0.61 0.70 0.66
0.47 0.52
0.45 50
0.38 0.39
0.15 0.20 0.24 0.20
0.17 0.13
0.05 0.01
0
-0.05 - 0.09

-1 0

0–3 Corporate
1–3 Treasury

3–7 Treasury

7–10 Treasury

10+ Treasury

Broad Treasury

Inflation-Linked Gov

Corporate

Long Corporate

Broad Corporate

High Yield
Intermediate
Average Excess Return (Monthly) versus US 1–3 Month Treasury Bills Average Cycle Excess Return
Hit % (% of Cycles Within Regime Outperforming the Benchmark)

Fixed Income Performance in the

Contractionary Phase

1.5 Excess Return (%) Hit Rate (%) 100

90
1.07
1.0 0.95 80
0.87
0.80
0.70 70
0.64 0.59 0.66
0.5 60
0.29 0.28
0.17 0.23 0.16 50
0.04 0.040.07
0.0 40
-0.01
-0.08 -0.08 30
-0.31
-0.5 20
10
-0.87 -0.80
-1.0 0
0–3 Corporate
1–3 Treasury

3–7 Treasury

7–10 Treasury

10+ Treasury

Broad Treasury

Inflation-Linked Gov

Corporate

Long Corporate

Broad Corporate

High Yield
Intermediate

Average Excess Return (Monthly) versus US 1–3 Month Treasury Bills Average Cycle Excess Return
Hit % (% of Cycles Within Regime Outperforming the Benchmark)

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data between February 1992 to May 2019, with the exception of “Inflation Linked Gov”.
Monthly Data between February 1997 to May 2019 for “Inflation Linked Gov”. Please refer to Appendix C for all the sources used in the analysis.

Fixed income performance shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest
in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.

Asset Performance and the Business Cycle A US Case Study 14

Conclusion

The analysis above serves to provide a general guide on how assets behave in different parts
of the business cycle. Of course, each business cycle is unique and additional analysis, on the
basis of fundamentals, may provide more insights on what assets are likely to outperform in
the near term. Additionally, secular industry trends, as well as technological advances, are less
influenced by economic cycles and may provide growth opportunities over multiple cycles.

Asset Performance and the Business Cycle A US Case Study 15

 Appendix A: Sectors
Exhibit 1a
Average Monthly Excess
Return of Sectors in
Different Cycles

Communication Consumer Consumer Energy Financials Health Industrials Technology Materials Real Utility
Services (%) Discretionary Staples (%) (%) Care (%) (%) (%) Estate (%)
(%) (%) (%) (%)

Recovery -0.45 0.72 -0.01 -1.30 0.06 0.17 -0.17 0.55 1.02 1.76 -1.75
Expansion -0.97 0.16 -0.66 -0.35 0.28 -0.58 0.15 0.59 0.19 -0.21 -1.15
Slowdown -0.05 0.05 0.01 -0.16 -0.09 0.24 -0.18 0.01 -0.66 1.04 0.61
Contraction 0.87 -0.59 2.08 1.54 -1.15 1.70 0.16 -0.92 -0.53 -0.88 1.81

 Green cells represent positive values

 Yellow cells represent negative values

Exhibit 1b
Average Full Period
Excess Return of
Sectors in Different
Cycles (Monthly)

Communication Consumer Consumer Energy Financials Health Industrials Technology Materials Real Utilities
Services (%) Discretionary Staples (%) (%) Care (%) (%) (%) Estate (%)
(%) (%) (%) (%)

Recovery 0.34 0.42 -0.68 -1.85 -0.33 -0.16 0.25 1.17 1.73 0.68 -1.75
Expansion -0.89 0.14 -0.60 -0.78 0.24 -0.71 0.15 0.32 0.33 -0.03 -0.99
Slowdown -0.13 -0.24 0.10 -0.41 0.11 0.19 -0.32 -0.08 -0.78 0.99 0.69
Contraction 2.39 -0.55 1.73 0.72 -0.93 1.70 -0.22 -0.80 -1.48 -0.40 1.53

 Green cells represent positive values

 Yellow cells represent negative values

Asset Performance and the Business Cycle A US Case Study 16

Exhibit 1c
Average Monthly Hit
Rate of Sectors in
Different Cycles

Communication Consumer Consumer Energy Financials Health Industrials Technology Materials Real Utilities
Services (%) Discretionary Staples (%) (%) Care (%) (%) (%) Estate (%)
(%) (%) (%) (%)

Recovery 43.75 59.38 59.38 40.63 53.13 50.00 46.88 53.13 68.75 21.88 31.25
Expansion 40.74 53.33 35.56 41.48 54.07 40.74 59.26 57.04 50.37 24.44 35.56
Slowdown 50.38 55.64 50.38 47.37 53.38 55.64 43.61 46.62 38.35 39.10 56.39
Contraction 51.79 39.29 67.86 62.50 39.29 69.64 57.14 50.00 41.07 26.79 62.50

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Exhibit 1d
Average Full Period
Hit Rate of Sectors
in Different cycles

Communication Consumer Consumer Energy Financials Health Industrials Technology Materials Real Utilities
Services (%) Discretionary Staples (%) (%) Care (%) (%) (%) Estate (%)
(%) (%) (%) (%)

Recovery 44.44 55.56 66.67 22.22 44.44 44.44 44.44 66.67 66.67 75.00 22.22
Expansion 35.00 70.00 20.00 25.00 60.00 30.00 75.00 65.00 50.00 50.00 15.00
Slowdown 47.62 38.10 57.14 38.10 52.38 57.14 23.81 42.86 28.57 75.00 71.43
Contraction 75.00 25.00 75.00 75.00 25.00 87.50 37.50 62.50 25.00 50.00 87.50

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data between September 1989 to May 2019. Communication Services is represented by the
S&P 500 Communication Services Index, Consumer Discretionary is represented by the S&P 500 Consumer Discretionary Index, Consumer Staples is represented
by the S&P 500 Consumer Staples Index, Energy is represented by the S&P 500 Energy Index, Financials is represented by the S&P 500 Financials Index, Healthcare
is represented by the S&P 500 Healthcare index, Industrials is represented by the S&P 500 Industrials Index, Technology is represented by the S&P 500 Information
Technology Index, Materials is represented by the S&P 500 Materials Index, Real Estate is represented by the S&P 500 Real Estate Index.

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Sector returns shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular
sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.

Asset Performance and the Business Cycle A US Case Study 17

 Appendix B: Smart Beta
Exhibit 2a
Average Monthly Excess
Return of Smart Beta in
Different Cycles

Low Volatility Quality Dividend S&P 500 Total Mid Cap Small Cap Small Cap Value Large Cap Value
(%) (%) Return Index (%) (%) (%) (%)
(%)

Recovery -0.11 0.51 -0.08 0.56 0.21 1.12 0.49

Expansion -0.57 -0.11 -0.07 0.22 0.30 0.15 0.10
Slowdown 0.29 0.22 0.00 0.07 -0.19 -0.25 0.10
Contraction 1.53 1.51 0.16 -0.01 -0.51 -0.46 0.37

 Green cells represent positive values

 Yellow cells represent negative values

Exhibit 2b
Average Full Period
Excess Return of
Smart Beta in Different
Cycles (Monthly)

Low Volatility Quality Dividend S&P 500 Total Mid Cap Small Cap Small Cap Value Large Cap Value
(%) (%) Return Index (%) (%) (%) (%)
(%)

Recovery -1.06 0.10 -0.01 0.31 -0.12 1.06 0.45

Expansion -0.39 0.03 -0.13 0.47 0.47 0.19 -0.01
Slowdown 0.42 0.26 0.02 0.05 -0.50 -0.46 0.04
Contraction 1.31 1.22 0.26 -0.49 -1.21 -1.80 0.08

 Green cells represent positive values

 Yellow cells represent negative values

Asset Performance and the Business Cycle A US Case Study 18

Exhibit 2c
Average Monthly Hit
Rate of Smart Beta
in Different Cycles

Low Volatility Quality Dividend S&P 500 Total Mid Cap Small Cap Small Cap Value Large Cap Value
(%) (%) Return Index (%) (%) (%) (%)
(%)

Recovery 31.25 31.25 25.00 50.00 40.63 12.50 46.88

Expansion 39.26 28.15 41.48 53.33 57.04 26.67 40.00
Slowdown 54.89 36.84 54.89 50.38 40.60 18.05 39.85
Contraction 55.36 41.07 50.00 33.93 39.29 10.71 37.50

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Exhibit 2d
Average full Period
Hit Rate of Smart Beta
in Different Cycles

Low Volatility Quality Dividend S&P 500 Total Mid Cap Small Cap Small Cap Value Large Cap Value
(%) (%) Return Index (%) (%) (%) (%)
(%)

Recovery 42.86 40.00 28.57 57.14 71.43 100.00 80.00

Expansion 21.05 41.67 31.58 63.16 68.42 75.00 61.54
Slowdown 66.67 58.33 66.67 42.86 33.33 12.50 53.85
Contraction 85.71 80.00 85.71 14.29 14.29 0.00 60.00

Source: Bloomberg, State Street Global Advisors. Monthly data between September 1989 to May 2019, with the exception of Quality Dividend, Small Cap Value and
Large Cap Value. Monthly Data between December 1999 to May 2019 for “Quality Dividend”. Monthly Data between November 1998 to May 2019 for “Large Cap
Value” and monthly data between June 2006 to May 2019 for “small cap value”. Low Volatility is represented by the S&P 500 Low volatility index, Quality dividend is
represented by the S&P High Yield Dividend Aristocrats Index, Mid cap is represented by the S&P 400 Mid cap index, Small cap is represented by the Russell 2000
Index, Small cap value is represented by the MSCI USA Small Cap Value Index and Large Cap Value is represented by the MSCI USA Value Exposure Select Index.

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Asset Performance and the Business Cycle A US Case Study 19

 Appendix C: Fixed Income
Exhibit 3a
Average Monthly Excess
Return of Smart Beta in
Different Cycles

1–3 3–7 7–10 10+ Broad Inflation- 0–3 Intermediate Long Broad High
Treasury Treasury Treasury Treasury Treasury Linked Corporate Corporate Corporate Corporate Yield
(%) (%) (%) (%) (%) Gov (%) (%) (%) (%) (%) (%)

Recovery 0.15 0.17 0.20 0.24 0.20 0.45 0.47 0.61 0.97 0.70 1.13
Expansion 0.01 -0.03 -0.10 -0.12 -0.06 0.21 0.17 0.25 0.44 0.30 0.84
Slowdown 0.09 0.30 0.49 0.78 0.36 0.33 0.15 0.32 0.49 0.37 0.33
Contraction 0.29 0.64 0.80 0.87 0.59 0.04 0.07 -0.01 -0.31 -0.08 -0.87

 Green cells represent positive values

 Yellow cells represent negative values

Exhibit 3b
Average Full Period Excess
Return of Fixed Income in
Different Cycles (Monthly)

1–3 3–7 7–10 10+ Broad Inflation- 0–3 Intermediate Long Broad High
Treasury Treasury Treasury Treasury Treasury Linked Corporate Corporate Corporate Corporate Yield
(%) (%) (%) (%) (%) Gov (%) (%) (%) (%) (%) (%)

Recovery 0.05 -0.05 -0.09 0.13 0.01 0.38 0.39 0.52 1.04 0.66 1.73
Expansion 0.02 0.03 0.01 0.05 0.01 0.33 0.15 0.26 0.52 0.33 0.67
Slowdown 0.15 0.45 0.70 1.14 0.54 0.41 0.20 0.43 0.68 0.52 0.35
Contraction 0.28 0.70 0.95 1.07 0.66 0.04 0.17 0.23 -0.08 0.16 -0.80

 Green cells represent positive values

 Yellow cells represent negative values

Asset Performance and the Business Cycle A US Case Study 20

Exhibit 3C
Average Monthly Hit
Rate of Fixed Income
in Different Cycles

1–3 3–7 7–10 10+ Broad Inflation- 0–3 Intermediate Long Broad High
Treasury Treasury Treasury Treasury Treasury Linked Corporate Corporate Corporate Corporate Yield
(%) (%) (%) (%) (%) Gov (%) (%) (%) (%) (%) (%)

Recovery 46.9 43.8 43.8 40.6 40.6 37.5 56.3 56.3 43.8 53.1 56.3
Expansion 52.6 48.1 48.9 46.7 46.7 43.0 64.4 62.2 54.8 60.7 74.1
Slowdown 55.6 54.9 56.4 60.9 57.1 45.9 61.7 58.6 62.4 60.2 63.2
Contraction 62.5 58.9 51.8 51.8 55.4 46.4 51.8 48.2 37.5 46.4 39.3

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Exhibit 3d
Average Full Period
Hit Rate of Fixed Income
in Different Cycles

1–3 3–7 7–10 10+ Broad Inflation- 0–3 Intermediate Long Broad High
Treasury Treasury Treasury Treasury Treasury Linked Corporate Corporate Corporate Corporate Yield
(%) (%) (%) (%) (%) Gov (%) (%) (%) (%) (%) (%)

Recovery 57.1 71.4 71.4 42.9 57.1 50.0 85.71 85.71 85.7 85.7 85.7
Expansion 60.0 45.0 50.0 50.0 50.0 40.0 60.0 60.0 55.0 60.0 70.0
Slowdown 71.4 66.7 61.9 71.4 66.7 47.6 76.2 71.4 71.4 76.2 66.7
Contraction 75.0 75.0 75.0 75.0 75.0 37.5 62.5 50.0 37.5 50.0 12.5

Source: Bloomberg Finance L.P., State Street Global Advisors. Monthly data between February 1992 to May 2019, with the exception of “Inflation Linked Gov”.
Monthly Data between February 1997 to May 2019 for “Inflation Linked Gov”. 1–3 Treasury is represented by Bloomberg Barclays US Treasury 1–3 Years Index,
3–7 Treasury is represented by Bloomberg Barclays US Treasury 3–7 Index, 7–10 Treasury is represented by Bloomberg Barclays US Treasury 7–10 Index,
10+ Treasury is represented by Bloomberg Barclays US Long Treasury Index. Broad Treasury is represented by Bloomberg Barclays US Treasury Index, Inflation-
linked Gov is represented by Bloomberg Barclays US Gov Inflation-linked All Maturities Index, 0–3 Corporate is represented by Bloomberg Barclays US Corporate
0–3 Year Index, Intermediate Corporate is represented by Bloomberg Barclays Intermediate Corporate Index, Long Corporate is represented by Bloomberg
Barclays Long Corporate Index, Broad Corporate is represented by Bloomberg Barclays US Corporate Index, High Yield is represented by Bloomberg Barclays
US Corporate High Yield Index and ICE BofAML 0–5 Year US High Yield Constrained Index.

 White cells represent values less than or equal to 50%

 Red cells represent values greater than 50% but less than 60%
 Blue cells represent values greater than or equal to 60%

Asset Performance and the Business Cycle A US Case Study 21

Contributors / Daniel Ung Shankar Abburu
Contacts CFA, CAIA, FRM Quantitative Research & Analysis,
Head of Quantitative Research & Analysis, SPDR ETF Portfolio Solutions
SPDR ETF Portfolio Solutions [email protected]
[email protected] Phone: +48 12 2016013
Office: +44 (0)203 395 6616

About SPDR ETF The SPDR ETF Portfolio Solutions team provides in-depth portfolio analytics to assist clients
Portfolio Solutions with their asset allocation, portfolio construction, and risk management.

Endnotes 1 Burns and Mitchell, Measuring Business Cycles, 1946,

NBER Book Series.
8 State Street Global Advisors, Bloomberg, October
1989 to June 2019.

2 McGuckin and Ozyildirim, Real-Time Tests of the 9 The Economics of Healthcare, Harvard university,
Leading Economic Index: Do Changes in the Index https://scholar.harvard.edu/files/mankiw/files/
Composition Matter?, Journal of Business Cycle economics_of_healthcare.pdf.
Measurement and Analysis, 2004.
10 Russell 3000 is used as the benchmark.
3 Hodrick, Robert J., and Edward C. Prescott. “Postwar
U.S. Business Cycles: An Empirical Investigation,” 11 Altman S. and Mechanic R. (2018), Health Care Cost
Journal of Money, Credit, and Banking 29 (1997), 1–16. Control: Where do we go from here? Health Affairs.

4 Russell 3000 was used for the analysis. 12 Contraction, Recovery & Growth: How factors
performed, Point of View, Northern Trust,
5 Bloomberg, as of 28th August 2019. November 2018.

6 How do electric utilities make money? Advanced 13 The benchmark US Treasury Bills 1–3 months.
Energy Perspectives.

7 Bartolini and Dong, Sector Business Cycle Analysis,

State Street Global Advisors, 2018.

Asset Performance and the Business Cycle A US Case Study 22

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Asset Performance and the Business Cycle A US Case Study 23