By this time most investors know that factor risks are sensitive to the phases of the business cycle. Ex-post we know that if we breakdown the business cycle into four phases there is a clear return differential across factor risk. The business cycle can be divided into recovery, expansion, slowdown, and downturns. There are a number of ways to measures these four phases and while a number of studies have used a common set of macro indicators there is no simple mapping between macro information and the business cycle.
Of course, any investor faces two problems: one, there are not that many cycles, so the sample sizes associated with these phases are small, and two, it is often hard to determine when we are in a specific business cycle phase. Nevertheless, it is clear you do not what to hold market beta during a downturn, but you want to have high exposure during the recovery phase. If you miss the recovery, you will underperform a buy and hold investor. The opposite is true for low volatility stocks. It is also clear that you will not go wrong if you hold stocks that see price momentum and earnings revisions.
There is a lot of room for differences in portfolio construction but ensuring that you think through portfolio dynamics is critical.
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