Investors in search of assets that will be resilient in an economic downturn can take comfort: The best protection against a slackening economy is probably in their portfolios already.
In our recently published research on diversification and correlations, we examined which asset types bring the most to the party in various economic regimes, including rising interest rates, inflation, and recession. While high-quality bonds were poor bets in periods of rising interest rates or inflation, they have been hands-down winners in weak economic environments historically.
Predicting Recessions Is Difficult
Economic growth slowed during the fourth quarter of 2025, owing to a combination of the 2025 government shutdown and moderating consumer spending. Although the US economy has proved resilient thus far in 2026, the onset of war in Iran and the spike in energy prices have renewed questions about the strength of the US and global economies.
Recession also loomed as a risk factor in 2023 and into 2024, as some market watchers believed that the Federal Reserve would overshoot in its efforts to stamp out very high inflation in the postpandemic period. The yield curve inverted, meaning that yields on longer-term bonds dropped below those of shorter-term bonds; such an inversion had historically been a harbinger of recession. Yet, recessionary worries generally declined through 2024 and much of 2025, thanks to still-robust gross domestic product growth and still-high levels of employment, and the yield curve returned to a more normal pattern of longer-term bonds yielding more than shorter-term ones. In other words, predicting a recession is a tricky business.
Examining Risk/Return During Recessionary Periods
The economy’s inherent cyclicality and the challenges of predicting the next phase of the cycle underscore the value of building a portfolio that’s resilient in the face of varying economic conditions. It’s therefore valuable to assess which assets have helped diversify US equity exposure in periods of economic weakness in the US.
To do so, we examined eight recessionary periods in US history. It’s worth noting that the definition of a recession varies. While “recession” is often defined as two successive quarters of negative GDP growth, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Some of those economic downturns were abbreviated, such as the start of the pandemic in February/March 2020, and some were more prolonged, such as the Great Depression in the late 1920s and early 1930s, which stretched on for 3.5 years. For each period, we examined the returns, volatility, and correlations of US large-cap stocks, US Treasury bonds, a 60/40 mix of the two assets, and a diversified portfolio, including a broad range of stocks, bonds, and other assets such as commodities, gold, and REITs.
Not surprisingly, stocks frequently contracted during past recessions, losing value in five of the eight periods we examined. Some of those losses were severe, such as the 24% annualized loss for US large-cap stocks during the global financial crisis recession. (Stocks’ peak-to-trough losses were even worse during that crisis, but 24% corresponds with the period in which the US economy was officially in recession.)
In that same vein, bonds logged positive gains in all eight of those same periods of economic contraction. The explanation for the strength of bonds during recessionary periods is twofold. The Federal Reserve often cuts interest rates during such periods, which boosts bond prices. Moreover, investors often retreat to safety, stability, and liquidity in periods of economic insecurity (high-quality bonds and cash) and away from higher-risk assets (equities).
Bonds’ role as ballast for equities is borne out by correlation data as well. Bonds’ correlation coefficient with equities during recessionary environments ranged from strongly negative (negative 0.56 from March 2001 to November 2001) to more positive but still well below 1.0 (0.65 from July 1981 to November 1982). Bonds have therefore provided significant diversification, even when stock/bond correlations were relatively high.
The 60/40 and diversified portfolios’ returns and volatility levels, as measured by standard deviation, tended to fall between those two extremes during economic downturns. The balanced and diversified portfolios didn’t lose as much as the equity-only portfolio, nor did they fare as well as an all-bond portfolio would have done during those economic stress periods. The diversified portfolio outperformed the plain-vanilla 60% US large-cap equity/40% intermediate-term government-bond portfolio in some recessionary environments, but not consistently. For example, the diversified portfolio performed worse than the basic 60/40 during the 2020 pandemic as well as in the early 2000s.
Mixed Signals Within Asset Classes
As noted earlier, stocks lost ground in five of the eight recessionary periods examined. While small-cap stocks are often characterized as more cyclical than large and therefore more likely to suffer in a recession, the data paint a mixed picture. Smaller stocks indeed performed horribly in some economic contractions, such as during the pandemic’s onset. However, they outperformed large-cap stocks in other periods of economic weakness, such as in the early 2000s, when investors rotated out of then-overvalued large caps in favor of smaller and more value-oriented stocks. Developed- and emerging-market stocks posted losses in line with or even worse than the US market’s in economic downdrafts in the US, as non-US economies are typically vulnerable to weakness stateside.
As noted earlier, core bonds have been consistently resilient in periods of economic contraction, and so have long-term Treasury bonds. Yet, even as government bonds have historically exhibited some of the lowest correlations with equities over long time horizons (see the section on taxable bonds), the data are mixed about which fixed-income type is preferable in recessions. In some periods, such as mid-1981 to late 1982 and early in the pandemic, long-term Treasuries have been the clear winners. In other recessionary periods, the core bond index, encompassing a diversified mix of Treasury and agency-backed bonds, asset-backed securities, and high-quality corporate bonds, has won. High-yield bonds have been unreliable in most recessions, however, typically performing in sympathy with stocks.
The data also burnish gold’s status as a safe-haven asset, with the metal gaining significant ground in every recession we examined. Other commodities have been much less reliable, however, posting massive losses during the three most recent recessions. Similarly, REITs have sometimes fallen in step with equities in economic downturns while holding up decently in other recessions.
What Does It Mean for Your Portfolio?
Of course, each economic downturn is different. Overall, though, high-quality fixed-income assets have been a boon to portfolios in most recessionary environments. That is largely due to lower yields and investors’ desire for the stability and safety of fixed income and cash assets during periods of economic turbulence, both of which boost bond prices. While high-quality bonds won’t cushion stock losses in every market environment (see: 2022, when interest rates rose), they have historically been reliable in periods of economic weakness. Gold has also proved its worth as a diversifying, safe-haven asset in recessionary environments. On the flip side, diversifying within equities hasn’t provided much of a defense during recessions. Smaller stocks and non-US stocks have often fallen in line with large-cap US stocks during economic downdrafts.
