🔍What Happens to the Stock Market During Recessions? What awaits the Stock Market Post Recession?
What Happens to the Stock Market During Recessions? What awaits the Stock Market Post Recession?
The stock market is often seen as a barometer of the economy, reflecting its ups and downs. However, the relationship between the stock market and recessions is not always straightforward. A recession is defined as a period of two consecutive quarters of negative economic growth, measured by gross domestic product (GDP). The stock market, on the other hand, is influenced by many factors, such as earnings, expectations, sentiment, interest rates, inflation, geopolitics and more. Sometimes, the stock market can anticipate a recession and decline before it officially begins. Other times, the stock market can remain resilient or even rise during a recession, as investors look ahead to a recovery.
In this blog post, we will look at how the stock market has performed during the past six U.S. recessions since 1980, based on data from web search results . We will also discuss some of the factors that affect the stock market's behavior during and after recessions, and what investors can do to prepare for them.
Stock Performance in Every Recession Since 1980
The following table summarizes the stock performance of the S&P 500 and the NASDAQ during every U.S. recession since 1980, as well as their peak-to-trough declines and recovery times.
| Recession | Duration | S&P 500 Return | NASDAQ Return | S&P 500 Peak-to-Trough Decline | NASDAQ Peak-to-Trough Decline | S&P 500 Recovery Time | NASDAQ Recovery Time |
|-----------|----------|----------------|---------------|-------------------------------|--------------------------------|-----------------------|----------------------|
| Feb 2020 - Apr 2020 | 2 months | -9.99% | -3.28% | -33.92% | -30.25% | 126 days | 76 days |
| Dec 2007 - Jun 2009 | 18 months | -37.56% | -30.95% | -55.47% | -53.43% | 895 days | 373 days |
| Mar 2001 - Oct 2001 | 8 months | -13.04% | -32.62% | -28.68% | -66.54% | 1,105 days | 1,882 days |
| Jul 1990 - Mar 1991 | 8 months | -6.56% | -17.80% | -19.92% | -31.50% | 310 days | 517 days |
| Jul 1981 - Nov 1982 | 16 months | -15.18% | N/A* | -27.11% | N/A* | 622 days | N/A* |
| Jan 1980 - Jul 1980 | 6 months | -9.36% | N/A* | -17.12% | N/A* | 147 days | N/A* |
*N/A: The NASDAQ was not established until February 1971 and did not have enough data to calculate returns for these recessions.
As we can see from the table, there is no clear pattern or rule for how the stock market performs during recessions. The duration, severity and causes of each recession vary, as well as the market's reaction and recovery time. Some general observations we can make are:
- The stock market tends to decline more than the economy during recessions, as measured by GDP.
- The stock market tends to recover faster than the economy after recessions, as measured by GDP.
- The stock market tends to perform better during shorter and milder recessions than longer and deeper ones.
- The stock market tends to perform better when recessions are caused by external shocks (such as COVID-19 or 9/11) than by internal imbalances (such as housing bubbles or inflation).
- The stock market tends to perform better when monetary and fiscal policies are supportive and stimulative during and after recessions.
Factors Affecting Stock Market Behavior During and After Recessions
The stock market is a forward-looking mechanism that tries to price in future events and outcomes based on available information and expectations. Therefore, the stock market's behavior during and after recessions depends largely on how investors perceive the current situation and how they anticipate the future.
Some of the factors that affect the stock market's behavior during and after recessions are:
- The cause of the recession: Different causes of recessions