Quality Factor Across Market Cycles: Resilience Through Peaks and Falls
Markets go through cycles: bull runs, corrections, crashes, and rebounds. Some stocks shine when everything is going up. But the real test of a company, and of a portfolio, is how it holds up when the tide turns.
Cycles test everything: sentiment, strength, and strategy. While some stocks soar only in bull runs, quality businesses are built to quietly endure, adapt, and emerge stronger across all market phases. And that’s where the quality factor stands out, not just delivering during good times, but also surviving the bad phases.
What is a Market Cycle?
A market cycle refers to the recurring pattern of growth, peak, decline, and recovery in the equity market. These cycles are driven by a mix of economic indicators, corporate earnings, investor behaviour, liquidity, and global sentiment. While their duration may vary, the phases tend to repeat over time.
Understanding market cycles isn’t about predicting them; it’s about preparing for them. And that’s where the quality factor shows its strength.
Understanding Market Phases and Investor Behaviour
Each market cycle typically has four common phases:
- Accumulation: This is when the market has fallen, and prices are low. There's little excitement, but smart investors quietly start buying good businesses at attractive prices.
- Mark-up: Optimism returns. Stock prices begin to rise, and more investors join the rally. Everyone feels confident, sometimes even when the fundamentals don’t fully support the hype.
- Distribution: Markets reach new highs, and most stocks look expensive. Excitement peaks. Many investors ignore risks and chase the hottest trends, often overlooking quality in the process.
- Mark-down: A sharp correction or crash follows. Weak companies tumble the most. Fear takes over, and many investors rush to exit, sometimes selling even strong businesses in panic.
These phases are natural. But investor reactions aren’t always rational; overconfidence in bull runs, panic in crashes, and FOMO in rebounds often lead to poor decisions. Throughout the phases, investor behaviour shifts from fear to greed to regret.
Different styles of investing or "factors" do well at different points in the cycle. Momentum may lead during bull runs. Value might bounce early in a recovery. Low Volatility can help cushion a fall. But Quality stands out for a reason: businesses with strong fundamentals and sound governance tend to hold up better across all phases.
Performance of Quality During Crises
Market downturns are the real test of resilience. Let’s look at how the Quality factor has behaved in real, high-stress market situations, not just theory, during two of the worst global downturns.
| COMPARATIVE ANALYSIS OF QUALITY PERFORMANCE | ||||||
| Portfolio Returns | DURING GLOBAL FINANCIAL CRISIS (GFC) | DURING COVID-19 PANDEMIC | ||||
| Pre GFC Bull-Period (30/09/2006 to 31/12/2007) | GFC Correction (01/01/2008 to 31/03/2009) | Post GFC Recovery (01/04/2009 to 31/12/2010) | Pre Pandemic Period (01/01/2019 to 31/12/2019) | During Pandemic Period (01/01/2020 to 23/03/2020) | Post Pandemic Period (24/03/2020 to 31/12/2021) | |
| NJ Quality+ Model | 54.67% | -53.87% | 197.47% | 2.92% | -33.47% | 179.90% |
| Low Quality Model | 105.41% | -74.07% | 153.43% | -17.86% | -41.66% | 183.93% |
| Nifty 500 - TRI | 82.15% | -56.67% | 116.72% | 8.64% | -36.67% | 139.79% |
Source: Internal Research, CMIE, NSE. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model and Low Quality Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.
Quality fell least in crises, helping preserve capital when it matters most. But it can be seen that it doesn’t just protect, it participates meaningfully in the upside as well, delivering strong long-term compounding. This dual strength, reduced downside, and meaningful upside make quality stand out as a powerful long-term compounding strategy.
| COMPARATIVE ANALYSIS OF FACTOR-WISE PERFORMANCE | ||||||
| Portfolio Returns | DURING GLOBAL FINANCIAL CRISIS (GFC) | DURING COVID-19 PANDEMIC | ||||
| Pre GFC Bull-Period (30/09/2006 to 31/12/2007) | GFC Correction (01/01/2008 to 31/03/2009) | Post GFC Recovery (01/04/2009 to 31/12/2010) | Pre Pandemic Period (01/01/2019 to 31/12/2019) | During Pandemic Period (01/01/2020 to 23/03/2020) | Post Pandemic Period (24/03/2020 to 31/12/2021) | |
| Nifty 500 Quality 50 | 52.14% | -45.90% | 161.90% | 1.80% | -28.47% | 124.28% |
| Nifty 500 Momentum 50 | 161.84% | -64.52% | 95.58% | 8.61% | -32.82% | 214.72% |
| Nifty 500 Low Volatility 50 | 56.89% | -37.77% | 129.53% | 8.17% | -26.52% | 99.74% |
| Nifty 500 Value 50 | 109.31% | -61.10% | 228.01% | -15.78% | -42.12% | 180.62% |
| Nifty 500 Multifactor MQVLV 50 | 65.83% | -45.63% | 175.67% | 3.55% | -26.78% | 126.54% |
| Nifty 500 - TRI | 82.15% | -56.67% | 116.72% | 8.64% | -36.67% | 139.79% |
Source: Internal Research, NSE. Past performance may or may not be sustained in future and is not an indication of future return.
The comparison table shows that while Momentum and Value factors often lead in sharp recoveries, they also tend to fall harder in corrections. Low Volatility offers better downside protection but may lag during recoveries. Quality offers a smoother ride, balancing performance with protection.
True Quality Performs and Protects: YoY Analysis
| Year | Nifty 500 Value 50 TRI | Nifty 500 Momentum 50 TRI | Nifty 500 Low Volatility 50 TRI | Nifty 500 Quality 50 TRI | Nifty 500 TRI |
| 2015 | -8.1 | 11.0 | 7.7 | 8.3 | 0.0 |
| 2016 | 23.3 | -1.6 | 1.9 | 0.5 | 4.7 |
| 2017 | 47.0 | 69.5 | 31.7 | 33.6 | 37.7 |
| 2018 | -26.4 | -10.9 | 7.2 | -2.0 | -1.6 |
| 2019 | -13.9 | 8.6 | 8.2 | 1.8 | 8.6 |
| 2020 | 8.1 | 20.9 | 24.1 | 27.3 | 17.7 |
| 2021 | 54.7 | 76.9 | 20.1 | 29.1 | 31.0 |
| 2022 | 23.2 | -7.6 | 7.3 | -2.8 | 4.3 |
| 2023 | 62.6 | 47.7 | 33.4 | 42.0 | 26.9 |
| 2024 | 19.3 | 26.5 | 16.0 | 23.0 | 16.0 |
| 2025 YTD | 1.6 | -12.4 | 8.6 | -5.3 | 0.8 |
Source: NSE. Past performance may or may not be sustained in future and is not an indication of future return. 2025 YTD data is from 01st January 2025 to 31st August 2025.
A closer look at over a decade of annual factor returns reveals something important: While factors like Value and Momentum swing between extremes, quality remains more consistent with fewer drawdowns and still participates well in recovery periods, highlighting its stability across the market phases.
Why Quality Delivers Through Cycles
True quality is multi-dimensional. The core strengths of quality businesses become even more visible during tough times:
- Strong balance sheets help companies survive credit stress and economic slowdowns.
- Stable earnings and low debt make cash flows more predictable and reliable.
- Clean and Sound Governance reduces the risk of shocks or corporate fraud.
- Efficient capital allocation drives long-term value creation.
These attributes make quality portfolios naturally defensive in drawdowns and reliable in upturns, making them ideal long-term companions in a portfolio.
A Smarter Way to Stay Invested
For long-term investors, chasing what’s working today often comes at the cost of regret tomorrow. A better approach is to anchor portfolios in quality and stay disciplined.
Here’s how to do that:
- Avoid reacting emotionally to market ups and downs. Focus on business quality, not just surface-level traits.
- Choose quality-focused mutual funds or long-term rule-based strategies to stay objective.
- Stay invested through market phases. Quality rewards patience more than prediction.
Conclusion: Ride the Cycles with Resilience
Market cycle shifts are inevitable, but not all portfolios are built to handle them. It's the consistency of quality that helps investors ride through volatile markets, avoid big mistakes, and grow wealth steadily. A quality-focused approach brings durability to your investments — helping you not just perform, but also protect.
At NJ Mutual Fund, our 100% rule-based investment philosophy embraces quality at its core, aiming to build resilient portfolios aligned with long-term financial goals and prepared for all phases of the cycle.
FAQs
1) What are the 4 phases of the market cycle?
The four phases of the market cycle are Accumulation, Mark-up, Distribution, and Mark-down. Each phase reflects changes in price trends, sentiment, and investor behavior.
2) What makes Quality stocks more resilient in volatile times?
Strong fundamentals, clean governance, and lower financial risk make quality stocks more resilient to perform and protect across the market phase shifts.
3) Why should investors consider the Quality factor for long-term investing?
Quality factor offers steady wealth creation rather than fast growth. It balances downside protection with long-term compounding, making it suitable for disciplined investing and long-term wealth creation.
Investors are requested to take advice from their financial/ tax advisor before making an investment decision.
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