This week’s economic data releases have shown that the economy may be slowing. On Tuesday, the Job Opening and Labor Turnover Survey (JOLTS) showed that job openings in July fell to 8.8 million, its lowest level in over two years. On Wednesday, the ADP employment report showed that job growth slowed to 177,000, a significant drop from the 371,000 July figure, and the second estimate for Q2 GDP was revised down from 2.4% to 2.1%. Thus far, the market has taken the weak economic data in stride as the S&P 500 (SPX) advanced nearly 2.3% for the week (through (8/31). However, with signs of economic weakness cropping up, we thought today would be an opportune time to look back at past recessions and see which asset classes performed the best.
We should note that we are not predicting a recession any time soon. Major U.S. banks, including JP Morgan and Bank of America, have recently changed their forecasts and said they no longer view a U.S. recession as the most likely outcome of the Fed’s efforts to cool inflation. Meanwhile, following the Fed’s July meeting, Chair Powell noted that the Fed staff was no longer forecasting a recession for the U.S. However, recessions are a normal part of the economic cycles, and at some point, the U.S. economy will experience another recession.
There is no hard-and-fast rule about what constitutes a recession; therefore, the recessions’ beginning and end dates and duration may vary. We have based our recession periods on the Federal Reserve’s Dates of U.S. recessions as inferred by GDP-based recession indicator data set, which shows five U.S. recessions that began since January 1, 1980. The dates and performance of several assets are shown in the table below.
Bonds have been the best-performing asset on average and the only one that shows positive returns during the last five recessions. Positive returns from bonds are not surprising as lowering interest rates to stimulate growth is almost always policymakers’ first move in the face of a recession. Gold is the only other asset that shows a positive average return during recessions, thus keeping with the common wisdom that gold is a haven during periods of uncertainty. Gold has performed remarkably well during the last three recessions, outpacing bonds. However, looking at the two earliest recessions in our study shows that there have been times when gold has significantly underperformed both stocks and bonds.
What may be more surprising is the assets that haven’t performed well during recessions. Gold and silver are often lumped together and are generally considered to be highly correlated. However, silver has been just under 2% on average in the last three recessions, while gold had an average gain of more than 18%. One possible explanation is that silver has more commercial/industrial applications, and its value is more greatly impacted by slowing economic activity.
Intuitively, we might expect value stocks to outperform the broader market. However, during the most recent three recessions, value has underperformed growth by an average of nearly 10%. The outperformance of growth over value during the COVID-era recession is not particularly surprising given that the “stay-at-home” trade dominated the market at that time; however, we can see that value also underperformed growth by a wide margin during the 2008 recession. There are a few possible (and not mutually exclusive) explanations for value’s underperformance: the declining interest rates usually seen during recessions help rate-sensitive growth stocks. Meanwhile, financials are more heavily represented in value indexes, and they (especially in the case of banks) tend to perform better in rising-rate environments. The Global Financial Crisis and the 2008 recession were largely due to a banking crisis. As a result, financials were the hardest-hit sector during the downturn, contributing to the wide underperformance of value during that period.
We can also see that, despite their moniker, low-volatility stocks have not held up particularly well during recessions. Some factors driving the underperformance of value may also help explain low volatility’s weakness, as there can be a considerable overlap between the two. Whatever the cause, the upshot is that, based on the historical record, we shouldn’t necessarily expect value or low-volatility stocks to hold up better than the broader market during an economic downturn.
Spectrum Wealth Counsel, doing business as Spectrum Wealth Management, LLC, is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.