As the current recovery ages and trade tensions garner headlines, a money manager’s thoughts turn to defensive sectors.  But how have the defensive sectors actually done in recent recessions? We examine the record in this post.

For an investment manager, there is an obvious appeal in knowing how sectors of the economy perform in recessions and expansions. During recessions, investors could shift exposure into sectors that perform better than the market (i.e. defensive or anti-cyclical sectors), and underweight sectors that perform worse (pro-cyclical sectors), with the opposite process occurring during expansions.



Sector Performance in Economic Cycles 1995-2018 chart


Except for a few outliers, it looks like the Street wisdom holds true.  We at Astor have also constructed market-cap weighted pro and anti-cyclical portfolios of equities based on the classification in the table above.  How do our portfolios perform in recession and non-recessionary periods over two recession periods?


Pro and Anti-Cyclical Portfolio Performance 1995-2018 chart


Our analysis lends some support to the existence of defensive sectors, and at first glance, the results are encouraging.  As Figure 2 shows, our anti-cyclical portfolio handily outperforms our pro-cyclical portfolio during recessions and lags during expansions as we would expect.  Of course, it bears noting that these portfolios still generate negative returns during recessions. Moreover, a glance at the underlying data highlights the risk of expecting industries to comport with economic theory.


Utility Sector and Market Performance 1995-2018 chart


As Figure 3 depicts, the “classic” defensive sector, utilities, is anything but, and indeed has had worse returns than the broader market during recessions.  We can extend this research back to the early sixties with a slightly different data set and find that utilities do indeed outperform the market in some recessions, but underperforms in others.

Of course, much of this reinforces what common sense tells us: stocks are not billiard balls which will always behave the same given the same force and angle of the shot.  This emphasizes the first rule of portfolio construction: diversification.  It also highlights the potential we at Astor see in understanding the relationship between the top-down fundamentals underlying each economic sector’s growth and corresponding asset valuation.   Astor’s Sector Allocation Fund does just that by weighting sector exposure appropriately based on multiple economic data points.


All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.