Chart of the Week: How Stocks Perform During Recessions

Chart of the Week: How Stocks Perform During Recessions

April 18, 2022

We’ve mentioned why we think it’s too soon to make the call about a recession—and nothing has changed on that front. But since the topic is trending in the headlines, I took a shot at creating a road map based on the historical record of how stocks perform during recessions.

Over the past 65 years, we’ve experienced 10 economic recessions in America—and no two have looked alike. Some have been mild and others severe. Some recessions ended in the blink of an eye (two months was the shortest) and others dragged on and on (18 months was the longest). And complicating matters from an investor’s perspective, the stock market has responded differently during each recession.

But how did stocks perform on average during economic downturns?

Given the wildly different lengths of past recessions, I tried to standardize them by putting them on the same time scale to give us a “percent complete” yardstick. In the chart below, 0% is the start of the recession, 50% is the middle and 100% is the end. The light blue area defines the upper and lower bounds of stock market performance at each step along the way. At the midway point (50%) of past recessions, the S&P 500’s return has ranged from -19% (1970) to 4% (2001).

On average, stocks were down 11% at the midway point of each recession. While economic downturns clearly aren’t good for the stock market, I’ll bet that an average 11% decline halfway through a recession is milder than most investors would have guessed.

I did find one shared characteristic of the market’s performance in every period I analyzed: In every one of the 10 recessions we’ve experienced over the past 65 years, stocks bottomed and began rallying before the recession was over. On average, stocks bottomed at the 60% point. Pinpointing that “60% over” mark in real time is a challenge (to say the least), but this stat argues for maintaining stock exposure during recessions; if you wait until the “all-clear,” you’ll have missed out on the initial market rebound.

Investing in stocks during a recession data
Note: Chart shows range of performance for the S&P 500 index (excluding reinvested dividends) along with the average return during prior 10 recessions (8/1957–4/1958, 4/1960–2/1961, 12/1969–11/1970, 11/1973–3/1975, 1/1980–7/1980, 7/1981–11/1982, 7/1990–3/1991, 3/2001–11/2001, 12/2007–6/2009, 2/2020–4/2020), rescaled to a “percent complete” timeline. Sources: National Bureau of Economic Research, S&P Dow Jones Indices, Adviser Investments.

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