Performance of SP500 in Recessions
The National Bureau of Economic Research has yet to declare that the US economy is in a recession, but they are usually late in making the call. On the other hand, many market commentators seem to think that a recession in the USA is a done deal. So I thought it would be instructive to look at how the SP500 has performed in past recessions.
For this study, we used the NBER's data on economic expansions and contractions. We "bought" the SP500 when the US entered a recession, and we sold our positions when the US exited the recession per the NBER's definition. We looked at data going back to 1960, and this captures only 8 recessionary periods.
Such a strategy of being long the SP500 during recessions produced the following MAE graph (see figure 1). MAE stands for maximum adverse excursion, and it measures how far a trade moves against its entry point before being closed out for a win or a loss. For example, note the caret inside the blue box in figure 1. This represents 1 trade. This trade (7/81 to 11/82) had a drawdown or MAE of 22.5% (x axis); however, this trade was closed out for a 5.8% (y axis) winner. We know the trade was a winner because the caret is green.
Figure 1. MAE Graph
Of the 8 recessions or trades, the SP500 lost 15% or more 6 out of 8 times at some point in time from the start of the recession; this is to the right of the orange line. 3 out of 8 occurrences saw the SP500 lose greater than 25% from the start of the recession. In essence, recessions have not been kind to equity investors.
The questions we want to know then are the following: 1) are we currently in a recession?; and 2)when did it start? If the recession started at the May, 2011 SP500 highs, then you could make an argument that the 20% down draft from those highs is within the realm of expected losses that are typically seen in a recession. If the start of the recession lies ahead, then I would expect equities to hit a few more rough patches. Of note, the shortest recession since 1960 was the 1980 recession, which lasted 6 months. So it is possible that May, 2011 could have kicked off the recession (if we are in one) and we could see it end in a short 6 months. But that scenario doesn't seem likely as most would agree that the economy is decelerating, and that there are too many structural problems here and around the globe to see a return to above trend line growth. The final scenario is to believe that we are not in a recession nor is the economy headed in that direction. I guess anything is possible, but the data and opinions of those much smarter than I does not suggest robust growth ahead.
Tweet
Circle Us