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camistocks (85.26)

How did the S&P 500 perform during the recessions dating back to 1948?

Recs

38

January 09, 2008 – Comments (15)

The stock market is always supposed to crash during recessions, isn't it? I wanted to find out if it's true, and how the S&P 500 index, as a reference for the general stock market performed during recessions since 1948. Please note that individual stocks/sectors may behave completely differently!

The stock market is supposed to be a forward looking indicator, ie it will fall before a recession starts, but it will also rise again before it ends.

First as an overview, a long term chart of the S&P 500 (SPX) vs. the unemployment rate (UR) dating back 60 years! (for some reason the UR isn't updated after 2003 anymore here, never mind)

There have been 10 recessions since 1948! UR was the highest in the early 1980s, it was almost 11%! As you can see, everytime UR suddenly surged, there was a recession. Recessions in the US seem to last 6-9 months on average.



Coincidentally NorthernTrust.com made a cool research just in time. They analysed all recessions back to 1953, how much SPX fell each time and how many months before a recession started/ended passed. Quote:

From table 1 two major conclusions can be drawn: (1). The S&P 500 is a leading indicator par excellence. Since the 1950s, the S&P 500 has always peaked before the peak of a business cycle, with one exception (1980 business cycle). The S&P 500 establishes a trough prior to the end of a recession without exception. (2). The median percent decline of the S&P 500 from its peak to trough is 16.9%. In the first three business days of 2008, the S&P 500 is down nearly 7.0% from its peak in October 2007. If history is a guide, brace yourselves for a rough ride in the months ahead.




So, let's have a look back in time...

1950s: SPX data starts only in 1950. From there it rose until the start of 1953, where a correction started 6 months before the recession , where the SPX according to Northern Trust (NT) fell only 11 % from peak to trough. From then it only rose. The bottom here was 8 months before the end of the recession!



late 1950s: the correction which took the SPX down 17% ended 4 months before the recession. As usual the UR rose suddenly, when the recession started.



early 1960s: this was a mild correction, despite recession. It also ended 4 months before the end of the recession. BTW, note the extremely strong correction of the stock market in 1962, where there wasn't a recession at all!



early 1970s: this was the end of the bull market period and many bear markets followed. SPX fell from early 1969 to mid 1970 and lost 27%! However it again recovered before the end of the recession... and rose until 1973 when it then lost 43%!! It fell before the start of the recession, but rose again before the end.



1980s: there were two recessions, in 1980 and again in 1981/1982. But each time the stock market again recovered before the end of the recession. The SPX lost 10%, and 18%, before the Great Bull Market started.



1990: the recession of 1990/1991 took the SPX down 14% and as usual the stock market recovered before the end of the recession, or 5 months. Note that there was absolutely no influence from the stock market crash 1987 on the real world economy! The unemployment rate only started to rise at the start of the 1990 recession!



2001: Again the SPX corrected much earlier, than the recession started. However in this exceptional case it continued to fall, because of 911, IMO!

Conclusion, the stock market always recovers before a recession ends. In fact the market usually recovers, when it looks terrible (although it can always get worse...)!

Note. only recessions are described here, not stock market corrections, which are more frequently.

15 Comments – Post Your Own

#1) On January 09, 2008 at 10:51 AM, camistocks (85.26) wrote:

BTW here is the current chart of SPX. The correction/bear market? has started in early October and you can draw a bearish downtrend line from every lower top. A 15 % correction would take the SPX to 1325, still some way ahead. On the other side, the correction/bear market has already started during the March correction, since the banks never really recovered since then. So almost 9 months have passed...

To have a new advance/bull market confirmation, this downtrend line must be taken decisively!

 

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#2) On January 09, 2008 at 1:38 PM, floridabuilder2 (99.59) wrote:

dude this is why you are one of my favorites.. a quick read of this blog gives me a clear picture of how i will play out this correction/recession...  i personally think the markets will bottom in the summer and attempt to rally towards the end of the year.. but we will see how things unwind from here

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#3) On January 09, 2008 at 1:39 PM, floridabuilder2 (99.59) wrote:

also, do you know how to insert a youtube video

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#4) On January 09, 2008 at 2:30 PM, camistocks (85.26) wrote:

hey thanks!

re.  youtube videos, On the right where it says "About this video" there is usually a link named "Embed". Just copy the code  as is and paste it into your blog. Hope it works!

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#5) On January 09, 2008 at 5:54 PM, EnigmaDude (90.57) wrote:

this is a great blog (yes, I rec'd it).

One thing I noted though is the lack of recessions during election years, except for 1980 (and I guess in 1960, but that was before I can remember!)

Do you have any thoughts on how the upcoming election might impact the duration of the recession or timing of market recovery based on past experience/stats?

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#6) On January 09, 2008 at 11:57 PM, camistocks (85.26) wrote:

Thanks Enigma!

An election year is usually always a positive for the stock market and the economy, since the sitting party (republicans in today's case) would not want to make it to easy for the opposition to win. So they will try to stimulate the economy. i expect a "package" to be announced soon with great fanfare!

On the other side, as you noted, it happened 1960 and 1980 (it cost Carter the presidency), and again more than 20 years have passed, so it could happen, based on statistical probability.

Bear markets in the SPX usually don't happen during election years. More on this in another blog. 

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#7) On January 10, 2008 at 2:33 AM, camistocks (85.26) wrote:

Here the actual unemployment rate. It is obviously rising again very strongly.

Also note: the NBER which is the so called  "independent judge" on when a recession has offically started or ended, only knows 12-18 months after a recession has really started, since the data always gets revised... So we will only know in a year, if the US really fell into a recession....

The stock market or the unemployment rate on the other side are an immediate "judge"!

 

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#8) On January 10, 2008 at 6:37 PM, TMFKopp (96.72) wrote:

cami... just awesome.

here's a thought, though -- what if you looked at the current S&P returns ex-energy? earlier today i was pulling apart sector performance for the S&P groups and found that there have been some really wide variances of late. most striking -- in the TTM period financials and consumer discretionary are down 20%+ while energy is up nearly 50%.

now there's a good argument that the S&P is the S&P, but i think that when we talk about a median market downturn being 15% or so during recessionary times we may actually be closer to that than current S&P returns suggest.

kopp 

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#9) On January 10, 2008 at 7:02 PM, camistocks (85.26) wrote:

Thanks Kopp and well observed! What's more I think about 45% of earnings in the S&P 500 are thanks to exports, and since the dollar is so low exporters are doing fine and holding up the index.

Small cap stocks, which usually do business only in the US have been devastated too, also technology. Financials and homebuilders are definitely in a recession!

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#10) On January 10, 2008 at 10:15 PM, TMFKopp (96.72) wrote:

cami... just awesome.

here's a thought, though -- what if you looked at the current S&P returns ex-energy? earlier today i was pulling apart sector performance for the S&P groups and found that there have been some really wide variances of late. most striking -- in the TTM period financials and consumer discretionary are down 20%+ while energy is up nearly 50%.

now there's a good argument that the S&P is the S&P, but i think that when we talk about a median market downturn being 15% or so during recessionary times we may actually be closer to that than current S&P returns suggest.

kopp 

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#11) On January 12, 2008 at 9:57 AM, MJKpayday (98.57) wrote:

Thanks for the a great blog.

Reading this blog creates a great historical view on the relationship between recessions and corrections (not so much corrections without recessions).  To average some of the ideas after reading this article it's reasonable to say the stock market peaks about 6 months before a recession begins.  Our peak would be in about October 07'.  Troughs typically occur only 6 months later (I was surpised it was that little), so perhaps that'd be April 08 and declines from peaks to troughs are about 15-20%. October 12 the S&P was 1561.  Today, January 12, the S&P is at 1401 or 10% off.  If I overlay a few samples of history over the next 3 or 4 months a recession will oficially begin in sometime in Q2, unemployment will see further sharp increases, the S&P will see even better (lower) prices, and the pundits will be talking about the end of the US stock market, economy, and the decline of America, followed shortly by the end of the world. 

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#12) On January 12, 2008 at 4:19 PM, AnomaLee (29.85) wrote:

"Bear markets in the SPX usually don't happen during election years. More on this in another blog."

----

That's because we take a biased view of a years performance that dates from January 1st - December 31st. Your performance on CAPs is like a much better version of me. So, I'll wait and see what you have to say about that later.

I didn't begin converting to cash until some of the rallies in December, but the peak was reached in July. I didn't feel comfortable buying sstocks after that until the DJIA reached 12800. This time I won't feel comfortable buying any large lots unless the DJIA reaches 11,650~11,900 depending on market data, sentiment & news. That's my new technical target of confidence. Don't ask how I instantly come up with these, but they've worked for me the past 2 years.

 

Love the blogs... 

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#13) On January 12, 2008 at 11:40 PM, HistoricalPEGuy (34.60) wrote:

I can't help but look for patterns --- here's one that seems interesting.... Wait for the unemployment rate to hit 6% then start buying like crazy.  Does anyone else see this?  I don't support this type of  "chartism", but it makes me think.

-- HPEGuy

By the way, this is already on the "Best Blogs of 2008" -- Great job.

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#14) On January 13, 2008 at 4:47 PM, camistocks (85.26) wrote:

Thanks for your comments!

MJKpayday: although the SPX topped out in October, I think the general stock market already topped out in July. More on this next time. I also expect to see Robert "Dow below 500" Prechter to present a new book on TV shortly before "the bottom"...

AnomaLee: Since the Fund managers "think" from Jan to Dec it almost becomes a pattern. I agree that the stock market topped out in July.

HPEGuy: interesting thought, let's keep it in mind. 

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#15) On January 28, 2008 at 1:00 AM, lquadland10 (< 20) wrote:

are there any charts from the 1910 to now?

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