Over the last 152 years, from 1869 to 2020 the U.S. has experienced 31 recessions (including the current recession), for a total of 43.8 years of economic contraction. And on average each recession lasted 17 months. Conversely, there have been 32 periods of expansion economic activity totaling over 108.2 years, with each one averaging 3.3 years. So, said another way, 71% of the time we are in an expansive economy and 29% we are in a contracting economy.
What is surprising, of these 31 recessions, 54% (17) of the time, the stock market actually went up. How is this possible?
Because the stock market is not the economy.
No one predicted this pandemic, it's impact on our economy, and the stock market's response over the last 6 months. The economy is down, the stock market is up. The world is complicated.
U.S. stock market peaks and troughs are often independent of the beginning and ending of recessions. In fact, the U.S. stock market many times peaks six months before the start of a recession.
The correlation between U.S. stock market returns and GDP over the 31 recessions is -0.1.
What does this mean? Correlation calculations and results can fall between -1.0 and +1.0. A correlation of +1.0 means two variables move in lock-step with each other, while a correlation of -1.0 means they move exactly opposite of each other. If one was up the other is down. Typically, a number between -0.3 and +0.3 can be understood to mean the two variables are not correlated with each other and basically move independent of one another.
What also might be surprising, the market tends to recover quickly, returning on average 23.5% in the 12-months following the end of a recession. As Warren Buffett has said, “Be fearful when others are greedy and be greedy when others are fearful.” An idea to keep in mind during the next recession and market downturn. Many times these downturns provide opportunities to purchase at a discount to intrinsic value.
It is difficult to time recessions, even more difficult to time the stock market.
Making predictions is easy...making accurate predictions is impossible.
The Stock Market is not the Economy.
Paul R. Rossi, CFA