Scenario guides / Recession & credit crunch
📉 Recession & credit crunch
A recession is a demand shock: households and businesses stop spending at the same time. The assets that survive best are the ones people cannot stop paying for — and the ones that benefit when central banks slash interest rates in response.
What history shows
The 2008 global financial crisis remains the modern reference point. The S&P 500 fell about 57% from its 2007 peak to the March 2009 trough. Banks were the epicentre — many lost most of their value or failed outright. Meanwhile US Treasuries rallied powerfully as the Federal Reserve cut rates to zero, and consumer staples fell far less than the broad market: people kept buying toothpaste. High-yield ("junk") bond spreads exploded past 20 percentage points over Treasuries as default fears spread.
The dot-com recession (2001) showed the same skeleton with different flesh: the most speculative assets (tech, this time) fell hardest and longest — the Nasdaq lost nearly 80% peak-to-trough — while bonds and defensive sectors preserved capital.
One caveat worth remembering from 2008: in the panic phase, almost everything falls together. Even gold dropped roughly 25% in late 2008 as leveraged investors sold whatever they could to raise cash — before rallying to new highs over the following two years. Liquidity crises punish everything first and sort winners later.
Assets that have tended to gain
- Government bonds — the star of the scenario: rate cuts lift bond prices, and flight-to-safety demand does the rest.
- Cash and short-term deposits — optionality when assets go on sale; recessions are usually disinflationary, so cash holds its value.
- Consumer staples, healthcare and utilities — demand barely moves with the economic cycle.
- Gold — after the initial liquidity squeeze, falling real interest rates historically support it.
Assets that have tended to suffer
- Banks and financials — loan losses mount exactly as lending margins compress.
- Consumer discretionary & luxury — the first budget lines households cut.
- High-yield corporate bonds — default risk is the whole story, and defaults cluster in recessions.
- Commercial property — tenants fail, vacancies rise, and refinancing gets harder just when it is needed.
- Industrial commodities — copper is nicknamed "Dr. Copper" precisely because it falls when the economy sickens.
Wildcards and caveats
The playbook above assumes central banks can cut rates. When recession arrives with high inflation — as in the 1970s — bonds lose their hero role, and the scenario becomes stagflation, a much harder environment. Also note that markets usually bottom well before the economy does: by the time a recession is officially declared, much of the damage is often already priced.