An Investor’s Guide to the Runup to Recession

Comparing pre-recession performance of multiple asset classes.

April 12, 2022

As the Federal Reserve (Fed) ratchets up its hawkishness—both in Fedspeak and in the latest minutes—the resulting market volatility and bouts of yield curve inversion show investors are discounting tighter and tighter financial conditions. The Fed has only just begun a hiking cycle and is contemplating shrinking its balance sheet as soon as May. The Fed’s policy, in its simplest formulation, is designed to slow down the economy, even to the point of recession, to try to tame inflation. The economy is still growing vigorously and the execution of Fed policy has yet to fully unfold, so fears of an imminent recession are overblown. But it is not too early to think about how different asset classes and market sectors perform in the period leading up to a recession.

Examining the 24 Months Before a Recession

Examining the 24 Months Before a Recession

Source: Guggenheim Investments, Bloomberg. This chart examines the 24 months prior to the last three recessions with start dates of 3.31.2001, 12.31.2007, and 2.29.2020, respectively. Gray areas represent recession.

With this in mind, we compared the average performance of multiple asset classes—equities, credit, government assets—over the 24 months leading up to three previous recessions. We divided the two-year pre-recession period into the first 12 months and the second 12 months. We can also think about these periods as the penultimate and the final year of expansion.

The conclusion is quite straightforward: Riskier assets have tended to perform well when the expansion is still in its penultimate year because this period, which historically overlaps a Fed hiking cycle, takes place when growth is strong. Strong growth means healthy corporate earnings, a stable labor market, low corporate defaults and bankruptcies, all of which support the performance of equities and high yield credit. However, by the final 12 months before a recession, rate hikes have tightened financial conditions and slowed economic growth. This environment tends to see lower-risk, longer-duration assets outperform riskier sectors. It is at this point, just a year out from recession, that investors should look to become more defensive. Because as Sir John Templeton famously said, the four most costly words in investing are “This time is different.”

Asset Returns in the Runup to Past Recessions

Asset Returns in the Runup to Past Recessions

Source: Guggenheim Investments, Bloomberg. Average annualized returns are based on monthly asset returns during the 24 months prior to the last three recessions with start dates of 3.31.2001, 12.31.2007, and 2.29.2020, respectively. Past performance does not guarantee future results.


From the Office of the Global Chief Investment Officer, Scott Minerd
By the Guggenheim Investments Macroeconomic and Investment Research Group

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal. Stock markets can be volatile. Investments in securities of small and medium capitalization companies may involve greater risk of loss and more abrupt fluctuations in market price than investments in larger companies. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

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