Recession Coming? Performances Of Four Most Popular Funds

Recession Road Sign

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Aside from inflation and higher interest rates, one word is on the lips of many of the most prominent investment experts: recession.

Recessions are typically defined as two consecutive quarters of negative GDP, (although other indicators may also be considered). In case you hadn’t heard, the Jan. through March quarter has already recorded a negative GDP of -1.5% according to a second estimate by government authorities.

Although many experts have dismissed this result as caused by a widening trade deficit and less business purchases of new inventory, they tend to agree that growth is set to slow this year, and while not turning negative, raising the risk of an upcoming recession. The Fed’s campaign to raise interest rates may have the effect of causing a recession as has happened in the past. According to a recent survey, 3/4ths of corporate chief financial officers say they expect one by the first half of next year.

Of course, no one can accurately predict when a recession will happen. Experts have a terrible track record when attempting to do so. In fact, we could possibly, but unlikely, already be in one, or maybe one won’t happen for years. Nor can anyone accurately predict when one, once started, will end. Further, we don’t know when a recession has officially begun or ended until months after the fact when the National Bureau of Economic Research (NBER) makes the call.

Given these unpredictable elements, it is still worthwhile for investors to know how stalwart funds performed during past recessions so that they can perhaps prepare in advance how to possibly make adjustments to their portfolios if they anticipate or actually get word that we are in a recession.

To check on how four funds which were in existence during the last six recessions and were also currently among those funds with the most assets, I identified four such funds from the Wall Street Journal. Each of these funds represents a different category of funds, with three stock funds and one bond fund. Two of the stock funds are index funds from Vanguard, which means that they now have multiple asset classes to include ETFs. The funds are:

Vanguard 500 Index Fund (VFINX); this is the original fund. It has been replaced by Vanguard 500 Index ETF (VOO) and the Admiral fund (VFIAX).

Vanguard Small Capitalization Fund (NAESX). It has been replaced by Vanguard Small Cap Index Fund (VB) and the Admiral fund (VSMAX).

Fidelity® Contrafund® (FCNTX). It also now has another class, FCNKX.

American Funds Bond Fund of Amer A (ABNDX). This fund now has many classes.

The six recessionary periods, as identified by NBER, along with dates and length, are shown below. Each is given a number so as to simplify the table that follows next showing the total return during the months shown for the chosen funds.

Recessions

1. Jan 1980 – June 1980. Length – 6 mos.

2. July 1981 – Oct. 1982. Length – 16 mos.

3. July 1990 – Feb 1991. Length – 8 mos.

4. Mar 2001 – Oct 2001. Length – 8 mos.

5. December 2007 – May 2009. Length – 18 mos.

6. Feb 20 – March 2020. Length – 2 mos.

Total Returns During Recessions

1.

2.

3.

4.

5.

6.

VFINX (Large Blend)

8.55

9.46

4.93

-13.89

-35.60

-19.59

NAESX (Small Blend)

4.95

11.61

-2.57

-8.22

-32.64

-32.64

FCNTX (Large Growth)

1.86

6.71

13.24

-9.82

-33.37

-15.43

ABNDX (Interm. Bond)

8.76

34.09

4.73

4.20

-7.77

1.81

Note 1. None of these performances are annualized

Note 2. If one did not purchase ABNDX as part of the Class F (no-load), their returns will be lower than shown due to a front-end load, currently 3.75%

Stock and bond fund returns will always vary from month to month and year to year. But as can be seen, returns for these three stock funds were mostly deeply negative for 10 out of 18 recessionary periods. The remaining 8 periods tended to show subpar returns, assuming stock funds have averaged about 9% over 12 months over very long periods. Averaging the returns for the three stock funds, the result is -7.69%, not annualized. So, we can see that remaining invested in even some of the best stock funds will usually lead to poor returns over the entire period. If we take the average return for the three stock funds over the 18 recessionary periods, the result is -7.6%.

Compare this to the returns for one of the most popular and long existing bond funds, ABNDX. In this case, this fund only showed negative returns in 1 out of 6 recessionary periods Assuming bond funds have averaged about a 4% return over 12 months over very long periods, this fund showed a somewhat above average return over all 6 recessionary periods, whose average return was 7.64%.

Discussion

Even some of the best stock funds in 3 different fund categories typically won’t escape being dragged down by a recession.

And, if I can generalize from the results of just one popular intermediate term bond fund, bond funds tend to outperform most broad-based categories of stock funds during these recessionary periods.

Therefore, even if it is hard to recognize in advance when we may enter a recession, once an investor suspects a recession, or one observes two quarters of negative GDP, a common indicator that we are in one, she/he might be wise to lighten up on their stock positions and increase their bond holdings.

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