How Stock Markets Have Performed During Past Recessions

When discussing the performance of stock markets, one of the most critical factors to consider is how these markets behave during economic recessions. Recessions, defined by the National Bureau of Economic Research (NBER) as significant declines in economic activity lasting more than a few months, can have profound effects on stock market performance. Here, we will delve into the historical data to understand the patterns and trends of stock market behavior during recessions.

Market Performance During Recessions

Since 1950, the U.S. has experienced 11 recessions, each with its unique characteristics but also some common trends. Here are some key observations:

• Market Declines: During these recessions, the S&P 500 has typically experienced significant declines. On average, the S&P 500 drops around 20% during the recession itself, with the market bottoming out approximately 169 days after the recession begins.
• Duration and Recovery: Most recessions are relatively short, lasting less than one year. Only three of the 11 recessions since 1950 have lasted more than a year. By the time the average recession ends, the stock market has often begun to recover. In fact, about half of the time, the market is back above breakeven by the end of the recession.

Historical Examples

• 2008 Recession: This was one of the most severe recessions, with the S&P 500 experiencing a 54% loss and the recession lasting 546 days. However, even in this case, the market began to recover once the recession ended.
• 2020 Recession: This was the shortest recession on record, lasting only 60 days, but it saw the steepest immediate sell-off. Despite this, the market quickly recovered, reflecting broader economic and stimulus factors.

Pre-Recession and Post-Recession Performance

• Pre-Recession: The year leading up to a recession often sees a modest decline in the stock market, with the S&P 500 typically falling about 4% in the year prior to the recession's start.
• Post-Recession: After a recession ends, the stock market tends to perform strongly. On average, the S&P 500 returns around +15.5% in the year following the end of a recession. This recovery continues, with the market often showing a significant rebound of almost 40% in the 18 months following the market bottom during the recession.

Correlation Between GDP and Stock Market

Interestingly, the correlation between GDP growth and U.S. stock market returns during recessions is nearly zero. This suggests that stock market performance is not directly tied to GDP declines during recessions. In fact, there have been 16 recessions since 1869 where the stock market returns were positive, despite economic contractions.

Long-Term Recovery

Historical data shows that financial markets have consistently rebounded from market shocks and recessions, posting strong long-term gains. Investors who have stayed invested for the long term have often benefited from these recoveries. For instance, after the 10 worst calendar year returns for the S&P 500 since 1972, the market has generally shown significant recovery over the subsequent years.

Investment Strategies

Given the volatility and unpredictability of market performance during recessions, a diversified, multi-asset portfolio can be an effective strategy. Regular rebalancing to investment policy weights and including alternatives can help mitigate drawdowns and align with long-term investment goals.

In conclusion, while recessions can lead to significant short-term declines in the stock market, historical data indicates that markets tend to recover swiftly and strongly once the recession ends. Understanding these patterns can help investors make more informed decisions and maintain a long-term perspective.

Reference Articles

• How Does The Stock Market Typically Perform During U.S Recessions (Russell Investments)
• What Happens in a Recession? (Fidelity)