At the start of economic downturns, what is the trading activity like for the US Dollar, Gold, S&P 500, and additional assets?
How Different Assets Perform During Recessions
Recessions in the United States can affect the financial market in different ways. In this special report, we will analyze how certain assets, such as the US Dollar, gold, S&P 500, Australian Dollar, and 10-year Treasury yield, have performed during the first three months of economic downturns.
Before we dive into the topic, let’s first understand what a recession is. In this study, we will use a GDP-based recession indicator, which helps us identify downturns based on a mathematical model. This is different from the widely known definition of two consecutive quarters of negative growth. The GDP-based indicator takes into account other economic trends as well.
To analyze the US and Australian Dollars, we will use a correlation-weighted currency index instead of just looking at the exchange rate. This helps us understand the overall direction of a currency against the world. Comparing AUD/USD with the DXY Dollar Index can sometimes give too much importance to the US Dollar.
Asset Performance During Recessions
Now let’s look at how these assets have performed during recessions. The chart below shows the performance of each asset, from best to worst: US Dollar, gold, 10-year Treasury yield, Australian Dollar, and S&P 500.
Since 1979, the US Dollar has, on average, risen by 3.3% in the first three months of economic downturns. However, it doesn’t always go up during recessions. The up/down ratio is 50%. But when the dollar does rally, it tends to do so strongly. This is because the US Dollar is considered a safe haven currency.
Gold has also performed decently during recessions since 1969. On average, it has returned +2.3% in the first three months. However, there have been some periods where gold performed poorly, like in the early 1980s recession. Gold is often seen as a safe investment when the return on cash is low.
10-year Treasury Yield
The 10-year Treasury yield has, on average, declined by -1.6% during the onset of recessions since 1969. Bonds tend to be in high demand during economic uncertainty, which pushes up their price but lowers their yields.
The Australian Dollar has, on average, returned -2.1% during the first three months of a US recession since 1979. The Aussie is known for its sentiment-linked status and closely follows equities. When the US economy is in trouble, it can negatively impact the Australian Dollar.
The S&P 500, which is a key US stock index, has, on average, returned -7.0% at the onset of recessions since 1969. The severity of the recession plays a role in how much the stock market declines. Uncertainty during recessions can lead to stock market crashes.
Recessions can have different effects on various assets. The US Dollar and gold tend to perform relatively well, while the 10-year Treasury yield, Australian Dollar, and S&P 500 underperform. It’s important to understand these patterns when making investment decisions during economic downturns.