Recession Coming? How 4 Of The Most Popular Funds Performed In The Past

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Tom Madell
1.45K Followers

Summary

  • Growth is expected to slow this year, thanks to Fed interest rate increases, although perhaps not enough to cause a 2022 recession.
  • Recessions are impossible to predict in advance, but when one comes, stock funds may be hurt particularly hard, as my data from the last six recessions below show.
  • Even highly popular stock funds have dropped sharply, while bond funds may have actually done better than they usually do.
  • Investors may want to consider this article's findings in making decisions about their portfolios.

Recession Road Sign

ZargonDesign/E+ via Getty Images

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.

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.

This article was written by

Tom Madell profile picture
1.45K Followers
Tom Madell, Ph.D., is the publisher of Mutual Fund/ETF Research Newsletter, a free newsletter which began publication in 1999 with thousands of readers. It has become one of the most popular mutual fund/ETF newsletters on the internet, as shown here. His site has been named as one of the "Top 12 Investment Newsletters Focusing on Mutual Funds" at mutualfunds.com , an important fund information provider, under "Fund Newsletter". Also, recently his Newsletter was recognized as one of 5 expert mutual fund resources worth following offering free, and, in its case, particularly "unbiased, useful, and original advice" at http://funds-newsletter.com/fundreference-art.htm .He is also a researcher/writer/investor whose articles have appeared on hundreds of websites, including the Wall Street Journal, USA Today, Morningstar and in the international media.His articles have been among the most popular among those posted on the Morningstar.com website by non-Morningstar employed contributors.His recommendations have an outstanding, long-standing record of success . His complete list of former articles can be accessed at http://funds-newsletter.com
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own VFIAX and VSMAX

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