Historical Stock Market Performance in Recessions

Stock Market Performance in Recessions

The impact of a recession on the stock market is a topic of great concern for investors worldwide. As the United States faces the possibility of an impending recession, many investors are wondering what this might mean for their investments and stock market strategy. To gain a better understanding of how the market has fared during previous recessions and how it has recovered afterward, we will examine the performance of the S&P 500 and NASDAQ during recessions since 1980.

The Historical Perspective

When examining the performance of stocks during recessions, it is important to note that while stocks have suffered during these periods, they have always recovered and even surpassed their pre-recession levels. This historical perspective provides reassurance to investors that holding through downturns has been a winning long-term strategy.

Key Findings

Here are some key findings from our analysis:

1. History is on the investors’ side: The S&P 500 and NASDAQ have consistently recovered to their pre-recession levels following every recession since 1980.
2. Days to recovery: Since 2000, the S&P 500 has taken an average of 647 trading days after the United States exited a recession to reach its pre-recession levels. The NASDAQ, on the other hand, has taken an average of 330 trading days.
3. Total declines in value: Since 2000, the S&P 500 has fallen an average of 18.58% over the course of a recession, while the NASDAQ has fallen 14.48%.
4. Steep peak to trough: Since 2000, the S&P 500 has experienced an average decline of 38.61% from its highest level during a recession, while the NASDAQ has fallen by 41.17%.

Having examined these general trends, let’s delve into specific examples of stock market performance during key recessions.

The COVID-19 Recession: A Short-Lived Slump

The COVID-19 recession, which lasted from February to April 2020, was primarily triggered by lockdowns, panic buying, and supply chain disruptions worldwide. During this recession, the S&P 500 fell by 9.99%, while the NASDAQ experienced a milder decline of 3.28%. The S&P 500 reached its lowest point during the recession, with a decline of 33.92% from its peak. On the other hand, the NASDAQ experienced a decline of 30.25% from its recession peak.

Following the end of the recession, the S&P 500 took 126 trading days to recover to its pre-recession level, while the NASDAQ recovered in just 76 days. This rapid recovery can be attributed to the unprecedented stimulus measures implemented by governments and central banks worldwide.

The Great Recession: A Prolonged Recovery

The Great Recession, which occurred from December 2007 to June 2009, had a more significant and long-lasting impact on the stock market compared to the COVID-19 recession. During this period, the S&P 500 fell by 37.56%, while the NASDAQ experienced a decline of 30.95%. The decline from their respective peaks was even steeper, with the S&P 500 falling by 55.47% and the NASDAQ by 53.43%.

Recovering from the Great Recession was a prolonged process. It took the S&P 500 a staggering 895 trading days to reach its pre-recession level, while the NASDAQ took 373 days. The severity of the recession and its impact on the financial sector were key factors contributing to the extended recovery period.

The Early 2000s Recession: Dot-Com Crash Woes

The early 2000s recession, which occurred from March to November 2001, coincided with the infamous dot-com crash. During this period, the S&P 500 fell by 8.2%, while the NASDAQ experienced a slightly higher decline of 9.2%. The dot-com crash had a significant impact on the NASDAQ, with a total decline of 39.82% from its peak.

The recovery from the early 2000s recession was a mixed bag. While the S&P 500 took 920 trading days to recover to its pre-recession level, the NASDAQ took an even longer period of 540 trading days. However, it is worth noting that the NASDAQ didn’t fully recover from the dot-com crash until 2015, more than a decade after the recession.

The Early 1990s Recession: A Mild Impact

In contrast to the previous recessions, the early 1990s recession, which lasted from July 1990 to March 1991, had a relatively mild impact on the stock market. During this period, the S&P 500 actually gained 4.36%, while the NASDAQ experienced a similar gain of 4.38%. However, both indices did experience declines from their respective peaks, with the S&P 500 falling by 21.57% and the NASDAQ by 32.53%.

The 1981-1982 Recession: A Resilient Market

The 1981-1982 recession, which occurred from July 1981 to November 1982, saw the S&P 500 and NASDAQ performing relatively well. The S&P 500 gained 6.76% during this period, while the NASDAQ experienced a slightly higher gain of 8.24%. However, both indices did experience declines from their respective peaks, with the S&P 500 falling by 28.39% and the NASDAQ by 31.59%.

The 1980 Recession: Impact of Energy Crisis and Monetary Policy

The 1980 recession, which occurred from January to July 1980, was primarily driven by the aftermath of the energy crisis and tight monetary policy. During this period, the S&P 500 gained 15.04%, while the NASDAQ experienced a slightly higher gain of 15.95%. However, both indices did experience declines from their respective peaks, with the S&P 500 falling by 19.83% and the NASDAQ by 27.99%.

How to Invest During a Recession

As we analyze the historical performance of the stock market during recessions, it is important to consider how investors can navigate these challenging times. While it is crucial to stay vigilant and be prepared for continued volatility and potential market dips, it is equally important to remain committed to a long-term investing strategy.

A diversified portfolio comprising of 25 or more quality, established businesses is a sound approach during recessions. Additionally, investors should carefully manage their cash and consider shifting their focus to the next five years rather than short-term fluctuations. Investing in established companies during the darkest times may yield significant returns in the long run.

In conclusion, while recessions can be challenging for investors, history has shown that the stock market has always recovered and surpassed its pre-recession levels. By adopting a long-term perspective, staying committed to a diversified portfolio, and focusing on quality investments, investors can navigate recessions with confidence and potentially reap substantial rewards.