Stock markets have been gyrating wildly as the world leaders’ close massive portions of the global economy in response to COVID-19. It’s safe to say that a global recession has begun, and that the U.S. is also in a recession. Moreover, fear has risen as investors attempt to understand what this could mean to their portfolios. Could stocks lose as much as they did in 2008? It’s quite possible. What can we learn from past recessions to help this time? Plenty. To address these issues, we will examine stock performance during the past six U.S. recessions, beginning in the mid-70s.
A note on the graphs below: Recessions are shaded grey, the Dow Jones Industrial Average is used for stocks, and dividends are excluded.
The 2008 Great Recession
Start: December 1, 2007
End: May 31, 2009
This recession brought the worst economic contraction since The Great Depression. Precipitated by a housing bubble which burst, U.S. stocks were only 2.7% overvalued when it began. Nonetheless, stocks proceeded to sink, ultimately losing 53.78% from peak to trough. By the time it ended, stocks had recouped about 14% of the loss, ending the recession down 40% from its October 9, 2007 peak (A-1).
Other noteworthy items include a record high close on the VIX of 80.86 November 20, 2008 (A-3). The VIX measures the expected volatility of the S&P 500 Index over the next 30 days. The yield on the 10-year U.S. treasury also fell to an all-time low during this period, dropping nearly 70% from 5.26% June 12, 2007 to 2.08% December 18, 2008 (A-2).
The 2001 Recession
Start: March 1, 2001
End: October 31, 2001
This recession was relatively mild. It began 13 months after the tech bubble burst and lasted eight months. It was worsened by the 911 tragedy which occurred six weeks before the recession ended.
Stocks bottomed twice during this recession, once March 24 and again September 21 (B-1). After each bottom, the Dow rose about 16% before hitting a new low. Stocks didn’t hit their ultimate bottom until October 9, 2002, almost a year after the recession. From its peak January 14, 2000 to its ultimate bottom October 9, 2002, stocks fell about 38%.
About a year before the recession began, stocks were 49% overvalued, which was a record high. When the recession began, due to the bursting of the tech bubble, this overvaluation had fallen to 9.5%. A year after the recession, stocks were about 33% undervalued, setting the stage for the longest economic expansion and bull market in U.S. history.
On January 26, 2018, stocks were 49.4% overvalued, breaking the previous record. Two short years later, February 19, 2020, another record was set when stocks became 58.9% overvalued.
Although the VIX spiked to 43.74% during this recession, it rose even higher after it ended (B-3). The 10-year Treasury also fell slightly (B-2).
The 1990 Recession
Start: July 1, 1990
End: February 28, 1991
The 1990 recession lasted the same length of time as the 2001 recession but was more severe. Stocks trended higher in the eight years prior and peaked two weeks after the recession began. Early in the recession, stock declined, losing 26% until bottoming October 11, 1990 (C-1). During this decade, stock markets soared until the tech bubble burst in March 2000.
The fear index (the VIX) was only a few months old at this point and topped out at 36.47 August 23, 1990 (C-3). The 10-year treasury also fell slightly (C-2).
The 1980 Recession: January 1, 1980 to June 30, 1980
The 1981-82 Recession: July 1, 1981 to October 31, 1982
The early 1980s saw two recessions. During the first, stocks fell a little more than 8.0% (D-1). In the second, stocks lost slightly over 23% (D-1). Once Fed Chair Volker tamed inflation, stocks soared, and the boom was back. In each case, the 10-year Treasury yield fell during the recession (D-2).
The 1973-75 Recession: November 1, 1973 to February 28, 1975
This recession was one of the longest. Sparked by the OPEC embargo against the U.S., it was also one of the worst for stocks. Stocks lost about 43% from the start of the recession to the bottom and dropped 49% if you begin January 11 that year.
What lessons can we learn from past recessions?
· Stocks may rise entering a recession.
· Stocks always decline during a recession.
· Stocks tend to rise before the recession ends.
· The degree to which stocks fall during a recession is affected by how long it lasts, its severity, and the valuation of stocks when it begins.
· Some of the best days in the stock market occur during a bear market.
During the Great Depression, after peaking, stocks fell 48% in two months, recouped half of its losses by mid-April 1930, then fell to its ultimate bottom July 8, 1932, a little over two years later. The total loss was 89.2% and it took until November 23, 1954, 25 years later, to surpass its September 3, 1929 peak.
How bad could it get this time? Stock performance is closely tied to corporate earnings, which is tied to economic activity. In the present case, economic activity will be worse than anything we’ve seen in our lifetime. Thus, stocks may fall as much or more than they did during the 2008 recession. While no one has a crystal ball, given the global and U.S. economic shutdown, we could see the worst period since the 1930s.
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