The Black Stratton Group - ScotiaMcLeod Markham

Given recent talk about an increased risk of recession, investors are concerned about how markets have behaved in recessionary environments, and how they should prepare. Northern Trust has put together the following analysis to provide historical context on how the S&P 500 has performed during recessions, as well as during the six months preceding and the twelve months following a recession.

 

Six Months Preceding Recessions

Northern Trust’s analysis indicates that, on average, markets lost 9% of their value in the six months preceding the official start of the recession. The negative performance is uniform across all recessions. For comparison’s sake, if we were to assume the U.S. had slipped into a recession starting December 31, 2007, the “six months prior” return would have been -2%. If the U.S. were to slip into a recession March 31st 2008, the “six months prior” return would be at -12% as of February 15, 2008. (Note: the S&P 500 had a -14% return from its peak on October 9, 2007 to February 15, 2008.)

 

Markets generally rebounded during the actual recession time period; exceptions were the 15% decline during the 1973 to 1975 recession and the 1% decline during the most recent recession. On average, markets gained 10% during the actual recession periods. The range broadens to include the 23% gains during the 1980 to 1991 recessions all the way down to the 15% decline during the 1973 to 1975 recession mentioned earlier.
*Using Bloomberg, price return data was gathered due to lack of total return data for all historical periods. Recession dates were gathered from the National Bureau of Economic Research.

 

Upon coming out of recession – using the 12 month period following the official end of the recession as the proxy – the range of returns broadens even further, suggesting a weaker influence of the recession event on index returns. In other words the recession is old news. Markets gained an average of 12% during this one year time frame, with returns ranging from -23% following the most recent recession to 41% following the 1953 to 1954 recession.

Performance Through Recessions

Combining all three time periods (from six months before the start of the recession to one year after the end of the recession) and averaging the results yields a 13% return. Recognizing that not all recessions were of equal length, results can be standardized by annualizing them, yielding an average annualized return of 5% throughout the entire period.

 

Historically, the best solution in any economic cycle is to maintain a well diversified portfolio and long term perspective. To discuss how your portfolio is positioned for potential recessionary conditions, contact a member of the Black-Stratton Group today.