A simple study finds a stock relationship that makes intuitive sense. The paper, "Procyclical Stocks Earn Higher Returns" shows that stocks that comove with the business cycle will earn higher average returns than those that are countercyclical.
Using close to 75 years of data on real growth expectations, the factor loadings associated with growth show a strong pricing premium that is independent of size, value and momentum effects. This business cycle effect is stronger for large value stocks and momentum winners. It is notable that expectations not realizations are what is priced in the market. The concerns of a switch in the business cycle are relevant when pricing assets. This paper shows again that have some macro focus even when building a long/short equity portfolio is important.
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