Equities & Recessions

by: Barry Ritholtz

There they go again.

The disinformation crowd is busy trying to confuse you, sucker you, make you lose money. It's not a conspiracy to make you poor -- just bad advice from the stupid.

No, stocks do not do well in recessions, as the usual dopes have said on TV.

Yes, they peak before the recession begins, and bottom before it ends, but by and large, it's a negative event for equities, as earnings falter and P/Es adjust, driving prices lower -- and at times, much lower.

According to Northern Trust's Asha Banglore, the movements of the S&P 500 just prior to and during a recession act as a leading indicator to future economic activity. Her analysis of leading/lagging properties of the index -- and how much it changes during a recession -- is presented below.

In the post war period, the median percent decline of the S&P 500 from its peak to trough around recessions is 16.9%. That's using a monthly S&P500 average; using weekly and daily averages produces steeper measurements of decline than does a monthly.

Monday's WSJ has a similar analysis:

"If the economy is heading into recession, as many on Wall Street fear, history may offer some clues about what that might mean for stocks.

No two downturns are alike, but a look at market performance during previous recessions gives some clues about whether the market will have a relatively smooth rebound, meaning investors should be setting themselves up for the recovery, or a long, tough slog."

You can vary the results depending upon which periods you review, what data periodicity you rely on, and how what you use for start and end dates of recessions.

But to say that stocks do not go down during recessions is frighteningly wrong...


The S&P 500 and Economic Recessions (PDF)
Asha G. Bangalore
Northern Trust, January 07, 2008

History Lessons: Past Recessions Yield a Few Clues
Stocks Can Suffer Badly, As Happened During '01,
But Not So in 1990-91

WSJ, January 14, 2008; Page C1

Recession Hits U.S. Profits; Economy Might Be Next
Rich Miller
Bloomberg, Dec. 3 2007