Lessons from Economic Declines

Barron's had a wonderful article in the September 15, 2008 publication titled "Lessons From Yesterday's Slumps." This article gives data on the effect of 6 investment alternatives during the previous 6 recessions.

The 6 recession dates are: 12/31/69 - 11/30/70, 11/30/73 - 3/31/75, 1/31/80 - 7/31/80, 7/31/81 - 11/30/82, 7/31/90 - 3/31/91, and 3/31/01 - 11/30/01.

The 6 investment alternatives are: commodities, real estate, S&P Total Return, Gold, Long Bond US Treasuries, & Oil. In a recession, the economy slows down and interest rates should decline. Let's look at the return for each investment during each period.

Commodities: - 6.2%, 23.9%, -16%, -9.9%, -10.8%, & -2.9%. Note that in general commodities decline, in 5 of 6 periods, except for the period of stagflation in the mid 70's.

Real Estate: -5.6%, 26.4%, 4.1%, -5.7%, -1.7%, & -1.8%. It is a mixed bag with more negative than positive.

S&P Total Return: -3.5%, -18%, 8.8%, 8%, 6.7%, & 1.3%. It is a mixed bag with more positive than negative.

Gold: 6.8%, 109.9%, 1.4%, 8%, -2.3%, & 3.8%. A mixed bag with generally a small positive result except for the period of stagflation during the mid 70's.

Long Term US Treasuries: 32.8%, -7.6%, 5.3%, 10%, 6.8%, & 1.7%. A mixed bag with more positives than negatives.

Oil: 0%, 95.9%, 11.8%, -6.9%, -4.8%, & 26.2%. A mixed bag with an outlier in the mid 70's.

What does all of this mean? If you hear that a recession is coming none of these 6 individually can guarantee a positive return. Diversify, Diversify, & Diversify