Topic #4 – Market Behaviour in US Recessions
Many investors are wondering if the US will enter a recession in the near future and the corresponding impact on their investment portfolios. To better understand how the market has performed during previous recessions and the recovery thereafter, this report looks at how the S&P 500 did in the last 5 recessions since the 1980s.
Looking at the data, recessionary declines tend to produce substantial drawdowns over a short timeframe, typically lasting under a year with the extent of decline ranging from a technical bear market drawdown of 20% to a substantial fall of over 50%. During a recession, there has always been a large relief rally period with gains of over 20%, which should not be mistaken as the end of the recession, that usually commences during or after the market bottoms. Looking at the 6-month market performance pre- and post- recession, stocks may or may not decline before the recession starts to serve as an indicator. However the market tends to bottom and begin recovering well before the recession ends, with a period of good gains stretching for the 6 months post the recession.
Recession-related stock declines represent serious corrections that have a steep peak-to-trough, falling an average of over 38% in the last 5 recessions. With the S&P 500 declining an unsubstantial 0.18% in the months leading up to a recession, investors should be wary that a period of market gains does not negate an impending recession with the most recent example being a 15% rally prior to the COVID-19 recession. In addition, with the 6-month performance post-recession rewarding investors with decent returns of over 9%, the key takeaway for investors is to buy the dips after a substantial decline in a recessionary period, even when they have missed the market bottom as they stand to benefit from a large rally. Last, but not least, investors should keep in mind history is on their side as the S&P 500 has recovered to pre-recession levels following every recession.
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