The market right now is a bloodbath, with red across the board. Even before the recent meltdown, stocks were off to their worst start to a year since 1939. We have the ultimate bearish mix of rampant inflation and slowing growth, and already several hikes are priced in before the end of the year, seeing stockholders flock to their investment apps in major panic sell-offs.
With this worsening sentiment, Invezz.com decided to look at asset class performance through previous recessions, ascertaining which sectors perform best and by how much. Traditionally, bonds and gold would be the safe havens during market pullbacks, but do the numbers back this up? In the study, we assessed five asset classes: gold, silver, stocks, bonds and real estate.
We used the definition of a recession as outlined by the National Bureau of Economic Research (NBER), which defines a recession as “a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales”.
The table below highlights five major recessions since the seventies, the date at which we commenced the study. A brief description of these recessions is below.
Year of Recession
Nov 1973 – Mar 1975
1973 Oil Crisis after quadrupling of prices by OPEC
Jan 1980 – Nov 1982
Tight monetary policy to refrain rampant inflation from 1970s, which resulted from 1973 Oil Crisis and Energy Crisis of 1979 (in turn caused by Iranian Revolution).
July 1990 – Mar 1991
Tight monetary policy to rein in inflation, high debt and 1990 oil shock
Mar 2001 – Nov 2001
Dot-com bubble pops. 9/11 attack
Dec 2007 – June 2009
Housing bubble leading to Great Financial Crisis
Let’s start with Gold, the traditional safe haven during recessions. We wrote an in-depth analysis of Gold’s performance during recessions recently, highlighting the numbers do in fact back up its reputation.
A 17 percent rise during the GFC is most notable, although it proceeded to continue to surge even after the recession technically ended, eventually peaking in September 2011, almost exactly double the price it was entering the recession.
It rose 27 percent during the seventies’ recession, 8% during the brief dot-com bubble and while it weakened slightly during the early nineties, this was a relatively mild and brief recession. The only true exception is the recession of the early eighties, when it fell 24 percent.
However, this is more to do with the timing of what we chose to define the recession as. With inflation rampant in the late seventies’ – hitting double digits, oil price shocks, the dollar weakening after the Gold Standard was renounced and sentiment dropping, Gold showed incredible gains – in the three and half years between Aug 1976 and Jan 1980, it rocketed 5X in price.
All in all, Gold backs up its claim as being a strong asset to own during recessions.
Silver has parallels to gold, but has been more volatile. The greater standard deviation of returns during recessions can be seen in the dispersion of returns between different recessions. Silver rocketed, for the same reasons as gold, during the seventies’ – however the vertical jump was steeper, returning a remarkable 700 percent to investors in an 18-month period from 1978, when it went from $5 to $35.
These gains were swiftly given back, however. While gold didn’t dip as far as its mid-seventies’ level, silver came close – falling all the way back down to $6 during the years technically defined as a recession.
The nineties and dot-com boom came and went without too much movement from silver, as the asset largely trended sideways. The early 2000s saw it rise to $20, before falling back to $10. Then it exploded again, going vertical from a 2009 level of $10 to close to $50.
Silver really does correlate well with gold – its correlation since 1973 is a near perfect 0.88. But the standard deviation is double – 10 percent vs 5 percent, highlighting the greater volatility, which during recessionary periods has resulted in superior returns for investors compared to gold.
Let’s make this brief, because it’s not exactly rocket science. During recessions, you do not want to own stocks. A quick glance at the below graph should be all it takes to realize this, when stocks have dropped during every recession. Look no further than the most recent =, when the S&P 500 halved during the GFC.
Bonds present as a more interesting case. There is a much wider variation of bonds on offer, and accordingly types of returns realized, when compared to either the stock market or bond market. Hence, analysis consistent with the above methods is unsuitable here.
The below graph from Darrow Wealth Management is instead a better approach, assessing different kinds of bonds and their performance during the GFC.
Immediately, we can see bonds do offer some protection, as the S&P 500 is comfortably below all bond indexes. Secondly, the outperformance depends on the credit quality of the bond. With safer securities, such as sovereign T-bills, the performance is good, leading the pack with an 11.6 percent gain.
However, as we dip further down the credit spectrum, we can see returns get progressively worse. The high-yield index was actually negative, failing to shield investors from the wider downturn, as the market questioned the ability of these companies to pull through the recession. These patterns, despite being shown for the GFC, are repeated in other recessions, showing bonds do provide good protection provided the credit quality is high enough.
T-bills are best placed, while high-yield bonds are to be avoided. Another thing is the variance of returns – the standard deviation is significantly less than gold or silver. So while the commodities provide greater returns, investment grade bonds offer a smoother return profile and lower volatility.
However, if one is capable of weathering more volatility, bonds lag other assets. As discussed, metals provide greater returns during recessions, whilst bonds underperform stocks and most other asset classes drastically in bull markets – meaning aside from a steady return profile, they don’t offer much to investors. That has only been exacerbated in high-inflation periods such as the one we are currently in.
Combined with a greater portfolio, however, they can lower overall volatility and help achieve financial goals.
Real estate, at least in the US, was surprisingly resistant through recessions. Gains of 12 percent and 17 percent in the seventies’ and eighties recessions provided homeowners with a nice hedge, whilst returns were relatively even in the brief recessions of the nineties and the dot-com bubble at the turn of the century.
The outlier, of course, is the most recent example – the GFC in 2008, as the graph shows.
The median house price fell over 20 percent peak-to-trough during the GFC, a historically large fall for an asset class that was supposedly immune to large down ticks. But recency bias should ignore the strong hedge that real estate has provided, aside from his instance – which of course was a recession caused by the subprime mortgage crisis.
Also worth mentioning is the fact that real estate bounced back so powerfully – up 110 percent since the lows of the recession. So while the recession immunity is not quite on the level of gold, real estate nonetheless presents as a nice asset to hold during recessions historically, should we look past one particular case.
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