When Stocks Sink, Who Swims? Comparing Performance Across Asset Classes During S&P 500 Selloffs
By James Picerno | The Milwaukee Company
Some asset classes routinely outperformed US stocks during the steepest drawdowns, but the winners list changes through time
Cash (or its equivalent) is the only asset class that routinely outperformed during the biggest S&P 500 drawdowns in recent years with a positive return
Every market reviewed below outperformed the S&P during its deepest drawdowns at least some of the time
How valuable is diversification across asset classes for minimizing the blowback from the sharp declines in the US stock market? It depends.
It depends on the particular time period of the market decline. There’s also quite a bit of variation in the degree of diversification alpha across asset classes. In some cases, an asset class posts a steeper loss vs. the downturn in the US stock market. But there are some solid wins as well.
For some initial perspective on how asset allocation has fared when American shares dive, TMC Research reviewed the results for the five deepest S&P 500 Index drawdowns since 2007. As proxies for the asset classes, we used a set of ETFs. Why is 2007 the start date? That’s the earliest common start date for the funds, which are used to show real-world results based on publicly traded portfolios.
During each of the five S&P drawdown events, we compared how ten different markets fared. The table below reports the performance for the S&P 500 drawdowns vs. comparable returns for the peak-to-trough declines for a variety of assets during the same time period. Results highlighted in green indicate that a given market outperformed the S&P drawdown, either by losing less or posting a gain. Red boxes highlight when a market posted a deeper drawdown vs. the S&P 500.
For example, during the 2007-2009 drawdown, the S&P shed 56.8%. US Treasuries (IEF), by contrast, rose 20.0% while small-cap stocks (IJR) fell 57.9%.
The drawdown history in the table above offers a number of key takeaways:
Some asset classes – such as Treasuries (IEF) – have routinely outperformed US stocks during the steepest drawdowns in recent history.
Every market in the table above outperformed the S&P during its deepest drawdowns at least some of the time.
Cash (SHV) is the only asset class that outperformed during the biggest S&P 500 drawdowns with a positive return in all cases.
Treasuries (IEF) and a broad measure of commodities (DBC) are tied for generating the strongest offsetting gain during an S&P drawdown – 20%, albeit in different drawdown episodes.
History is a guide, but the results above should be viewed cautiously since every drawdown event is different and subject to a potentially unique set of risk factors. The future, in short, remains uncertain as always.
The case for diversifying across asset classes, as a result, remains compelling as the first line of defense with risk management for the simple reason that it’s never obvious which market (or markets) will provide ballast in the next significant drawdown for US equities.
Keep in mind too that asset allocation’s benefits sometimes go beyond efforts at managing drawdowns that might be deeper with a less-diversified portfolio. The potential for higher returns is also a possibility via globally diversified strategies, at least during some time periods. For example, foreign stocks and gold have outperformed US equities by a wide margin year to date.
No one knows when a particular asset class will outperform or underperform US equities, or how long a return divergence will last. That lays the strategic foundation for maintaining a globally diversified portfolio to help smooth out the rough edges for an uncertain future, and perhaps, at times, lift the odds of outperforming a more concentrated strategy.
