How does this year’s stock market drawdown compare to those during recent recessions?
The chart above illustrates the impact on GDP and the equity markets of the 11 recessions in the U.S. since 1950. Clearly, equity market performance is influenced by a range of factors, including the severity of the economic downturn, the underlying cause of the recession, and market valuations at the outset. In those 11 recessions, the average decline in GDP was about 3%, while the S&P 500 experienced an average drawdown of about 30%. Three were more extreme examples, including the deep recession in 2020 caused by the pandemic, as well as the particularly deep bear markets that accompanied the Global Financial Crisis (2008), and the bursting of the tech stock bubble (2001).
As we discussed in a recent commentary, effectively calling the top or bottom of a market cycle is impossible. With two consecutive quarters of negative GDP and the Fed still in tightening mode, the path to a soft landing has narrowed. Of course, a larger unknown risk could emerge, but conditions today still appear to be considerably better than during the Global Financial Crisis in 2008 or in the virtual overnight shutdown of much of the U.S. economy in the early days of the COVID-19 pandemic in 2020. The July equity rally notwithstanding, the peak-to-trough stock market pullback this year (24% in mid-June) was not far from the average bear market accompanying a recession.
That doesn’t mean that equity volatility couldn’t continue for some time, but it does suggest that a meaningful degree of recession risk may have been priced in. Moreover, the market recovery is likely to begin before the economy bottoms. Whether July’s advance signified a turning point in the market cycle or a temporary advance amid a bear market remains to be seen. Still, it’s a reminder that the market doesn’t wait for all sources of uncertainty to clear for stocks and other risk assets to advance. As in past cycles, we expect that stocks will climb the wall of worry again in the current cycle. If that climb hasn’t already started, it will in due time, and it will start through a haze of risk that will keep some investors on the sidelines.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.