Tuesday, January 15, 2008

Stock Market Performance During Recessions

Common Wisdom often suggests that the US Stock Market indices go down during a US recession. How true is this?

According to National Bureau of Economic Research (NBER), there have been nine Recessions (*) from 1950 to 2007.



The S&P 500 Stock Market return during these nine recessions has averaged -0.4% with a low of -22.9% (1973 to 1975) to a high of +16.4% (1953 to 1954).

If we look at the return of the S&P 500 six months before the Start of the Recession to the Peak, the S&P 500 during this period returned an average of -3.7%.

If we look at the return of the S&P 500 six months before the Start of the Recession to the Trough, the S&P 500 during this period returned an average of -4.1%.

Any Positives?

The S&P 500 during US Economic Recession from 1950 to 2007 has been mildly flat to down, confirming common wisdom. However, we can take some positives from the data.

The average ratio between the length of time of an Expansion to the length of time of a Contraction, is 6.7. This means that for every month the US market contracts, (during this particular 1950 to 2007 period) the US market expands 6.7 months.

The S&P 500 return from Previous Trough to Current Trough (8 entries from 1950 to 2007) averages a whopping 80%. If we annualize this per year, the stock market S&P 500 returned 11.7% during expansion phase from 1950 to 2007.

(*) Definition of Recession According to NBER

According to NBER:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement on how the NBER's Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03.


Other Views of Stock Market Returns during US Recession

New York Sun Article.

MarketWatch's Mark Hulbert Article.

BestWayToInvest Article

S&P 500 Index Values used in Research

The NBER Cycle link only provides the month start and end of a Recession. S&P 500 prices were sampled at the first day of the month mentioned by NBER.

2 comments:

Investment Scientist said...

I did a study of recession and stock market performance similar to yours. I looked at the one, three, ten year returns after the start of a recession for both the S&P 500 index and a small cap value index. I posted the study in my blog.

techfarmer said...

Investment Scientist:

Good blog and post! Interesting take on Recessions and I'm glad you looked at small cap performance too.