Recessions and Historical Market Performance
Updated: Jan 1
This article discusses historical market performance during and following previous recessions.
An economic recession is widely expected in 2023. We may already be in a recession.
However, based on historical market performance during recessions as we'll cover in this article, even if we knew for a fact that the economy would formally go into a recession in 2023, this doesn’t necessarily mean the market will go down.
In the past, markets have bottomed and started on the path towards a sustained recovery well before the economy itself has bottomed.
Recessions eventually end. When they do, the time period near the end of and following the recession is one of the historically strongest periods for markets.
Markets Bottomed and Started Recovering Before the Economy
During the six major business cycles since 1950, the S&P 500 Index bottomed and started recovering while the economy was still getting worse 6 out of 6 times.
The images below compare the S&P 500 Index to the level of the overall economy as measured by GDP during the Eisenhower Recession in the 1950s, the Stagflation Era of the 1970s, the early double-dip recession of the early 1980s, the Savings & Loan crisis in the 1990s, the Global Financial Crisis around 2008, and the COVID pandemic in 2020.
As you can see in each of the six graphs above, the S&P 500 Index (the blue dotted line) reaches a bottom and begins heading higher before the economy does (represented by the gold GDP line).
The S&P 500 Index recovery has come before the economy's recovery during each recessionary period since 1950. Markets generally lead the economy.
Markets Don't Always Decline During Recessions
The average S&P 500 Index return is -1.5% during past recessions as shown in the image below. As expected, recessions are not great time periods for investment returns.
However, during the nine recessions since the 1950s, the S&P 500 Index has been positive 4 out of 9 times, or about 44% of the time.
During the recessionary period of the early 1980s, a time period potentially most analogous to today where the Federal Reserve intentionally induced a recession by rapidly raising interest rates to combat high inflation, the S&P 500 Index was positive by double digits as shown below.
Returns are weaker than long-term averages during recessions, returns certainly can be negative, but markets don't always decline during recessions.
Jumping in and out of markets and attempting to time the end of a recession can result in missing out on one of the historically strongest time periods for returns...
Markets Performed Well Coming Out of Recessions
The image below has historical performance data for the S&P 500 Index coming out of recessions.
The time period towards the end of and following recessions has been one of the historically strongest periods for market returns.
Here's a summary of key points:
During the 3 month period before recessions ended - the S&P 500 Index has been positive 9 out of 9 times and the 3-month return has averaged 12.9%. The time period near the end of recessions is one of the strongest periods for markets historically.
During the 1 year after recessions ended - the S&P 500 Index has been positive 8 out of 9 times and the 1-year return has averaged 15.3%.
During the 3 years after recessions ended - the S&P 500 Index has been positive 9 out of 9 times and the annual return over the three year period has averaged 11.8% per year (the image below shows 40.1%, which is the total return over 3 years on average).
During the 5 years after recessions ended - the S&P 500 Index has positive 9 out of 9 times and the annual return over the five year period has averaged 12.2% per year (the image below shows 78.7%, which is the total return over 5 years on average).
What to do About the Potential Recession?
Recessions have happened many times before.
The S&P 500 Index has eventually recovered and continued on to new highs every single time.
We may be heading into a recession in 2023 if we're not already in one.
However, even if we knew for a fact that the economy was heading into a recession in 2023, this wouldn't necessarily tell us what markets will do in 2023.
Historically during recessions, markets have bottomed and started on the path to a sustained recovery well before the economy improved.
Further, the time period near the end of and following recessions has been one of the strongest periods for market performance historically.
Attempting to time when a recession will end requires luck to execute and can result in missing out on the eventual strong recovery when it arrives.
To reduce the risk that the potential recession will harm your long-term financial security, establish a well-organized, comprehensive retirement plan and stick with your plan. Particularly during challenging times like now.
This will help protect your long-term financial security up to and throughout your retirement.
Want To Discuss This Individually?
1 - For clients: Call or email me any time as always.
This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures