How assets behave through the cycle

The basic idea

Each asset earns its return from a different source. Shares depend on company profits, and profits rise and fall with the economy. Bonds and FDRs pay a fixed amount set in advance, so they are more sensitive to interest rates. Gold pays nothing; its price moves with demand, the dollar and people’s fears.

So the same economic news lands differently on different assets. News of a recession can push shares down, while at the same time bonds bought earlier can rise on hopes of rate cuts. What follows are general tendencies; every cycle is different, and markets often move ahead of or behind expectations.

Why it matters to an investor

• To set expectations: knowing beforehand that shares can fall a lot in a recession makes a drop less of a shock.
• To see why diversification works: mixing assets that do not move together makes the whole portfolio swing less.
• To match money to when you need it: in a recession your job or income is at risk, and that is exactly when share prices may be low. Where you keep money needed soon matters.
• To understand rate changes: the policy rate changes with the cycle, and that changes both new FDR rates and bond prices.

Typical tendencies, asset by asset

• Shares: in a boom profits rise and prices usually follow; in a slump the reverse. Markets look ahead, so shares often fall before a recession starts and begin rising again before the economy has recovered.
• Bonds and government securities: when rates are cut in a slump, bonds bought earlier usually rise in price. But when inflation is high and rates go up, bond prices fall.
• FDRs and savings: the amount does not fall, so they are relatively steady in a slump. But new FDR rates follow the policy rate with a lag, and high inflation eats into the real return.
• Land and flats: prices change slowly and are not visible every day. In a slump prices can stall and selling can take time.
• Gold: many treat gold as a “safe haven” in a crisis, and sometimes its price does rise. But that is not guaranteed; the dollar and interest rates also move the gold price a lot.
• Cash: its value does not swing, which is reassuring in a slump. But inflation slowly erodes its buying power.

A few examples from history

In the US Great Recession of 2007–09, the S&P 500 share index fell about 57% from its October 2007 peak to its March 2009 low, and house prices fell about 30% on average from mid-2006 to mid-2009. Over the same period the US central bank cut its rate from 5.25% to 0–0.25%.

At the start of COVID, in April 2020, Bangladesh Bank cut its repo rate from 5.75% to 5.25% and banks’ cash reserve ratio (CRR) from 5% to 4%, so banks would have more money to lend. Cutting rates and adding money to banks is a familiar central bank response to a downturn.

Not every downturn is the same

When a downturn comes from falling demand, inflation usually falls too, rates are cut, and bonds cushion some of the fall in shares. But when growth slows because fuel or other costs have risen, inflation can stay high. The central bank then raises rates, and shares and bonds can fall together. So you cannot assume the next downturn will play out exactly like the last one.

Worked example

Common mistakes

• Treating a general tendency as a sure rule, such as “gold always rises in a recession”.
• Chasing whatever did best last year, even after the cycle has turned.
• Selling shares after the bad economic news arrives, when the market may already have priced it in.
• Keeping money you will need soon in an asset whose price can fall most exactly when a recession hits.

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