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Which Investments Do Best—and Worst—in a Recession – The Wall Street Journal

With academics, economists and pundits arguing over whether the U.S. is in a recession, many investors are wondering how to shift their portfolios amid the current economic uncertainty and its effect on finan…….

With academics, economists and pundits arguing over whether the U.S. is in a recession, many investors are wondering how to shift their portfolios amid the current economic uncertainty and its effect on financial markets.

If we are in a recession, what’s the best way to reposition a portfolio to maximize returns? And if this is just the lead-up to a recession, what then?

My research assistants, Zi Yang and Yuge Pang, and I decided to examine how various asset classes have fared leading up to recessions and during recessions—as defined by the National Bureau of Economic Research—over the past 50 years. We studied the seven recessions in that period (1973-75, 1980, 1981-82, 1990-91, 2001, 2007-09 and 2020) and found that growth stocks led the way in the lead-up to recession. But, once we entered a recession, fixed income far outperformed equity, with international stocks providing the worst returns by far.

Recession Results

How investment categories perform going into a recession, and during it

Average monthly return in the nine months leading up to recession

Average monthly return in recession

Average monthly return in the nine months leading up to recession

Average monthly return in recession

Average monthly return in the nine months leading up to recession

Average monthly return in recession

Average monthly return in recession

Average monthly return in the nine months leading up to recession

The asset classes we examined were U.S. high-yield bonds, U.S. long-term bonds, U.S. short-term bonds, U.S. total fixed income, U.S. growth stocks, U.S. value stocks, U.S. small-cap equity, international equity and U.S. large-cap equity.

In the nine months before the start of a recession, U.S. growth stocks delivered an average monthly return of 0.92% (a compound annualized return of 11.6%), followed by U.S. small-cap equity at 0.83% monthly (10.4% annualized). U.S. total fixed income averaged a monthly return of just 0.48% (5.9% annualized).

But in a recession, U.S. total fixed income averaged a monthly return of 0.62% (7.7% annualized), while U.S. growth stocks returned an average of 0.12% monthly (1.5% annualized). Returns were negative for every other equity class we studied.

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Among the fixed-income classes, U.S. high-yield bonds are notable for having the lowest …….

Source: https://www.wsj.com/articles/recessions-investments-best-worst-performers-11662061934

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