Last week I broke down a 60/40 portfolio’s performance by decade. I was curious what drove performance in a diversified portfolio – stocks or bonds – and decades were a quick way to find out. But not the best way. It was pointed out that using economic cycles was a better way to break it down.
Thanks to some help finding the dates to changes in the economic cycle, and scrounging up monthly performance data, I was able to get a 60/40 portfolio’s performance during recessions and expansions.
I stuck with the same date range – 1929 to 2014. Using the NBER dates for changes in the economic cycle, I pieced together total returns of a 60/40 portfolio made up the S&P 500 for stocks and 10 Year Treasuries for bonds (with annual rebalancing). I tossed in the S&P 500 and Treasury total returns as a comparison.
| Driver of Total Returns in 60/40 Portfolio by Recession | |||
| Period | 60/40 TR | S&P 500 TR | 10 Yr Treasury TR |
| 8/29 to 3/33 | -50.21% | -74.62% | 15.29% |
| 5/37 to 6/38 | -11.20% | -23.97% | 5.52% |
| 2/45 to 10/45 | 18.52% | 27.81% | 4.59% |
| 11/48 to 10/49 | 4.55% | 3.80% | 5.32% |
| 7/53 to 5/54 | 20.00% | 27.17% | 9.24% |
| 8/57 to 4/58 | 1.16% | -6.57% | 11.91% |
| 4/60 to 2/61 | 13.92% | 18.09% | 7.72% |
| 12/69 to 11/70 | 3.62% | -3.57% | 14.18% |
| 11/73 to 3/75 | -8.77% | -18.06% | 1.42% |
| 1/80 to 7/80 | 11.14% | 16.07% | 3.76% |
| 7/81 to 11/82 | 25.70% | 14.23% | 43.93% |
| 7/90 to 3/91 | 8.78% | 7.92% | 9.26% |
| 3/01 to 11/01 | -2.32% | -7.12% | 4.88% |
| 12/07 to 6/09 | -15.72% | -35.26% | 9.64% |
The results above don’t paint a clear picture. Recessions can produce good and bad results. Yes, some recessions were worse than others on investment returns, but collectively sticking through it seems to be a better option than trying to time the worst ones.
The two deepest recessions, the first and last, produced the worst returns. I doubt it’s a surprise that a deep recession impacts stocks poorly.
The rest, the shallower recessions, show mixed results. The one standout is that bond returns were never negative. For the most part, a portfolio with bonds produced better returns in 10 of the last 14 recessions.
In either case, recessions don’t last very long, about 9 months on average. The low number of recessions and the short length doesn’t offer much to go on. The only thing we do know is recessions don’t always produce bad returns and recessions end.
| Driver of Total Returns in 60/40 Portfolio between Recessions | |||
| Period | 60/40 TR | S&P 500 TR | 10 Yr Treasury TR |
| 4/33 to 4/37 | 135.23% | 236.39% | 18.92% |
| 7/38 to 1/45 | 53.86% | 71.17% | 24.64% |
| 11/45 to 10/48 | 9.05% | 14.67% | 0.35% |
| 11/49 to 6/53 | 48.08% | 90.37% | -2.94% |
| 6/54 to 7/57 | 44.28% | 85.83% | -5.54% |
| 5/58 to 3/60 | 20.53% | 35.23% | -2.43% |
| 3/61 to 11/69 | 64.58% | 94.86% | 20.64% |
| 12/70 to 10/73 | 29.08% | 35.81% | 18.37% |
| 4/75 to 12/79 | 47.49% | 61.64% | 27.02% |
| 8/80 to 6/81 | 5.14% | 12.48% | -5.84% |
| 12/82 to 6/90 | 200.05% | 244.81% | 138.90% |
| 4/91 to 2/01 | 238.14% | 310.36% | 134.86% |
| 12/01 to 11/07 | 46.14% | 44.28% | 38.66% |
| 7/09 to ?* | 97.45% | 151.26% | 28.90% |
*Returns are through 2014.
Since the 1929 Depression, the average time between recessions is about 59 months or almost five years. That should help put the numbers above into context. Basically, the economy spends most of the time growing. That growth doesn’t guarantee great returns every time.
In any case, stocks are the primary driver of return between recessions. There was only one period were bonds actually helped produce better results – from Dec. 2001 to Nov. 2007. Still bonds never outperformed stocks while the economy was growing.
This shouldn’t deter you from staying diversified between recessions. The obvious reason being that, even during periods of economic growth, stocks do fall. Bonds play an important role when it happens. And you never know when a growth cycle ends and a recession begins.
Trying to time economic cycles is about as easy as timing the market. NBER can only spot the turns in hindsight and months after the fact. For instance, the June 2009 recession end date was announced in Sept. 2010. If it takes them that long, imagine trying to do it in real time.
In any given week, the economic picture is slowly revealed with monthly data releases. The markets bounce around based on all the new information. Pull one string and nothing could happen. Pull another and it could send ripples through every market. You can spend a lot of energy guessing which string will send ripples next.
It’s one thing to know all the economic data, but it’s another thing to know what to do with it. Sometimes information is just information. The economic data makes for a great story, but trying to invest with it seems silly. A growing or receding economy doesn’t guarantee good or bad returns, just a return. I think it’s better to understand that the economy does turn and how it affects different businesses.
