Cyclical Recovery: What Works Best?

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Cyclical Recovery: What Works Best?

We’ve talked a lot about the 2008 Playbook in the last month to highlight how things can still go wrong for risk assets; today, let’s look at what worked best from 2009 – 2010, the initial period of recovery after the Financial Crisis.

First up: annual total returns for a variety of major asset classes:


  • MSCI Emerging Market Equities: +79.0%
  • US High Yield Corporate Bonds: +57.5%
  • MSCI EAFE (non-US developed economies): +32.5%
  • Russell 2000 Small Caps: +27.2%
  • S&P 500: +26.5%
  • US Investment Grade Corporate Bonds: +5.9%


  • Russell 2000 Small Caps: +26.9%
  • Emerging Market Equities: +19.2%
  • US High Yield Corporate Bonds: +15.2%
  • S&P 500: +15.1%
  • MSCI EAFE: +8.2%
  • US Investment Grade Bonds: +6.5%

Takeaway #1: a little incremental risk exposure can go a long way to boosting portfolio returns when markets finally turn higher. Even slight shifts in portfolios’ weightings in late 2008 to riskier asset classes like EM or even high yield bonds delivered dramatic results in 2009. And if you missed the 2009 moves, the same was still true in 2010.

Takeaway #2: asset classes feed off each other on the way up as much as the way down. For example, US Small Cap companies are often unprofitable so high yield corporate bond spreads are an important indicator of their access to/cost of capital. When high yield markets rallied in 2009 and spreads declined, this had a positive knock-on effect for small caps.

Takeaway #3: Crisis lows can make for some unexpectedly strong asset class returns in the subsequent upturn. In 2009, US High Yield Corporates beat every equity asset class except EM. In 2010, they bested the S&P 500 and EAFE equities. Not bad for a bond fund…

Next: S&P Large Cap Sector (only those that outperformed):


  • Technology: +61.7%
  • Materials: +48.6%
  • Consumer Discretionary: +41.3%
  • Real Estate: +27.1%
  • S&P 500: +26.5%


  • Real Estate: +32.3%
  • Consumer Discretionary: +27.7%
  • Industrials: +26.7%
  • Materials: +22.2%
  • Energy: +20.5%
  • Telecomm: +19.0%

Takeaway #1: most of these sectors are classic early-cycle groups (Discretionary and Materials especially so). Real Estate features prominently because of the declining interest rate environment in 2009 – 2010, of course.

Takeaway #2: Financials are usually the textbook early-cycle group, but the Financial Crisis and its aftermath meant this sector underperformed in 2009 (+17.2%), 2010 (+12.1%) and even during the Greek debt crisis in 2011 (-17.1%). The group did then finally outperform in 2012 (+28.8% vs +16.0%), 2013 (+35.6% vs. +32.4%) and 2014 (+15.2% vs. +13.7%), but that was out of its usual cyclical pattern.

Takeaway #3: the best single result listed above is Tech’s 62% return in 2009 as markets finally relaxed a bit and valuation multiples expanded, but… Keep in mind that Tech actually underperformed in 2010 (+10.2%), barely kept pace in 2011 (+2.4% vs. +2.1% for the S&P) and lagged in 2012 (+14.8%) and 2013 (+28.4%).

Final thought: the big winners in a cyclical upturn are often the asset classes and groups that were most unduly ill-treated on the way down. While you know our views about the potential for further losses, if you disagree (i.e. are much more optimistic than we are), then history says Technology should be one group that bounces back first.

Excellent visualizations of annual returns: