• In order to understand how trends in market leadership can change, we examined isolated historical performance of asset-class pairs during periods close to recessions.
  • While impossible to know what the next five years will look like, we have a high degree of confidence that they won’t look the same as the past five years.

Recessions have a way of shaking up leadership trends in financial markets. These economic low points also tend to serve as pivot points for relative asset-class performance.

Should investors today expect this to hold true as the COVID-19 crisis — the sharpest economic downturn since the Great Depression — gives way to recovery? We will not venture a prediction, and we don’t expect to learn the answer until after having the benefit of several years’ hindsight. Nevertheless, it’s worth reviewing the historical record to get an idea of how asset classes have behaved around past recessions. 

Our Research

Given our goal to understand trends in market leadership, we examined five-year return figures (rather than short-term performance) of the following asset-class pairs:

  • U.S. versus non-U.S. equities
  • U.S. large-capitalization stocks versus U.S. small-capitalization stocks
  • U.S. growth stocks versus U.S. value stocks
  • Inflation-sensitive assets versus nominal assets (that is, assets that tend to be negatively impacted by rising inflation)

We sought to determine whether continuity or change in relative asset-class performance was more prevalent by contrasting the five-year periods before and after each of the following U.S. recessions: 

  • Early 2000s recession (2000 to 2001) 
  • The Great Recession between 2007 and 2009

Our Findings 

U.S. and non-U.S. equities have shown a clear pattern of exchanging market leadership when an economic cycle is near a turning point. This is what occurred in the early 2000s when U.S. stocks led their non-U.S. counterparts before the recession and international stocks took the lead after the downturn. The inverse of this shift occurred later in the decade, when non-U.S. equity leadership prior to the Great Recession gave way to U.S. equity leadership in the period that followed. 

Growth and value also swapped performance positions during each of the last two recessions. In the early 2000s, growth initially led the market before yielding to value. The pair once again swapped places several years later when value leadership ahead of the Great Recession turned over to growth after the downturn.

Large- and small-capitalization stocks have also tended to reverse leadership roles at economic inflection points. Larger caps went into the recession of the early 2000s as market leaders and came out of the period overtaken by small caps. As for the time around the Great Recession, the dynamic between these two asset classes appears a bit atypical at first glance as small caps led large caps both before and after the historic downturn. However, large caps outperformed when looking at shorter periods (three or four years rather than five years) leading up to the Great Recession. This dynamic fits well with our expectations for the inherently more mature, stable businesses and stronger financials of large-capitalization stocks to deliver stronger relative performance in challenging periods.

Inflation-sensitive assets (commodities, real estate, and energy stocks) have also tended to alternate with Treasurys (typically considered the standard-bearer for nominal assets) as market leaders. Inflation assets trailed Treasurys before the early 2000s recession and ranked near the top coming out of the turn. While the Great Recession was a bit more mixed, Treasurys once again led before the 2007-to-2009 downturn yet came out of the period lagging real estate and energy. 

SEI’s View

As we can see from looking at the five-year period leading up to the COVID-19 crisis, many of the trends among these pairs have been subject to stark divergences.

We cannot possibly know what the next five years will look like (let alone the next 12 months), but we have a high degree of confidence that it won’t look the same as the past five years.

Whether investors analyze economic-cycle-induced changes from year to year or decade to decade, or compare five-year periods as we’ve showcased here, the overarching story has consistently included three key themes: (1) market leadership historically changes; (2) no one knows what the future will hold (3) the future will likely look different.

We believe this reinforces the necessity of continued discipline in adhering to a strategic long-term approach for constructing and maintaining globally diversified investment portfolios.

Download the full PDF for illustrations.

Our analysis uses U.S. recession end dates for the Early 2000s and Great Recessions, and uses mid-year (i.e. June 30, 2020) for the COVID-19 crisis. Sources: National Bureau of Economic Research, Bloomberg, Morningstar, SEI.

Index definitions

Legal Note

Important Information
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There are risks involved with investing, including loss of principal.

Information provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI).