Equities, Earnings and Recessions

There they go again.

The disinformation crowd is busy trying to confuse you, sucker you, make you lose money. It’s not a conspiracy to make you poor — just bad advice from the stupid.

No, stocks do not do well in recessions, as the usual dopes have said on TV.

Yes, they peak before the recession begins, and bottom before it ends, but by and large, recessions are typically a negative event for equities. Earnings falter, and P/Es adjust, typically driving prices lower — and at times, much lower.

According to Northern Trust’s Asha Banglore, the movements of the S&P 500 just prior to and during a recession act as a leading indicator to future economic activity. Her analysis of leading/lagging properties of the index — and how much it changes during a recession — is presented below.

In the post war period, the median percent decline of the S&P 500 from its peak to trough around recessions is 16.9%. That’s using a monthly S&P500 average; Using weekly and daily averages produces steeper measurements of decline than does a monthly.


Today’s WSJ has a similar analysis:

"If the economy is heading into recession, as many on
Wall Street fear, history may offer some clues about what that might
mean for stocks.

No two downturns are alike, but a look at market
performance during previous recessions gives some clues about whether
the market will have a relatively smooth rebound, meaning investors
should be setting themselves up for the recovery, or a long, tough slog."



You can vary the results depending upon which periods you review, what data periodicity you rely on,  and how what you use for start and end dates of recessions.

But to say that stocks do not go down during recessions is frighteningly wrong . . .


The S&P 500 and Economic Recessions (PDF)
Asha G. Bangalore
Northern Trust, January 07, 2008   

History Lessons: Past Recessions Yield a Few Clues
Stocks Can Suffer Badly, As Happened During ’01,
But Not So in 1990-91

WSJ, January 14, 2008; Page C1

Recession Hits U.S. Profits; Economy Might Be Next
Rich Miller
Bloomberg, Dec. 3 2007

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What's been said:

Discussions found on the web:
  1. Eric Davis commented on Jan 14

    *nods*…. as the Positive PEG rate makes the market rise,

    Negative PEG drives it down.

    With 5% growth a P/E of 10-20 can be reasonable.
    With a 0% growth, P/E needs to be 5-10..

  2. Bonddad commented on Jan 14

    You mean Donald Luskin is wrong? Heaven forbid!

    Thanks for the smackdown.


  3. la grande poussée commented on Jan 14

    I think the 70’s and 80’s markets were not affected by the Large $s in Hedge funds, etc.

    Actually, I think the swings will be wider.
    It’s hard to spin something up that is falling.

    As a person who goes in and out of a market in the same day (not a daytrader in the classic case) I end up in cash at the end of the day, except for my long-term holdings – which represent 20% of my investment assets. Otherwise, this market will require taking advantage of daily swings – or sideline plays.

  4. michael schumacher commented on Jan 14

    IBM “might” make some money and the futures are up 100 pts.

    Just another Monday full of surprises…
    I guess Bushco was busy getting money for (insert the next recipient of a bailout here) in Kuwait over the weekend.


  5. Advsy commented on Jan 14

    Are those numbers inflation adjusted?
    Seems like some of those positive returns were in periods of high inflation.

    A 3% gain with 6% inflation is not what we call a big win in my neck of the woods.

  6. Eric Davis commented on Jan 14

    MS, the theory that the big brokers are bidding up the futures, and selling into them…

    that seems like a great trade.

    point is, that is starting to win over the PPT theory…

    Just saying….

  7. cinefoz commented on Jan 14

    One newscast said that a large part of IBM’s earnings were due to currency fluctuations. If so, it will become common knowledge in a few days.

    For those who don’t know what this means .. here goes.

    IBM negotiates long term contracts overseas in the currency of the country. If the dollar falls relative to the currency of the contract, the value of the contract in US dollars rises because the stronger foreign currency can be traded for more dollars than expected when the contract was negotiated. (IBM undoubtedly buys options to protect itself if the dollar strengthens.)

    Thus, when their financials are released, we will be able to tell if IBM’s profits were due to excellent management of fortunate currency translations.

    On another note, I’m 100% cash and I’m getting antsy. I really want to jump in, but I still think there is one more good wave of selling that will happen before the Fed meeting. Maybe 3% on the S&P and 5% on the Dow.

    Screaming finance babies will hype it into the end of the world. Nightly newscasts will open with it as a bad news story. I’m probably going to buy into that fall, if it occurs. Worst case, I will just have to wait a few months longer to see a profit.

    I’m looking at brokerages, tech, a lot of international, maybe consumer staples, value really sucks right now so maybe some of that … all sector related investing. Transportation is face down on the dirt. Could it get any worse? Advice welcome on sector potential.

    One more thing, I expect to sell all in May, or there-about. I don’t think any rise will be a recovery. Rather, it will be profitable variation.

  8. Steve Barry commented on Jan 14

    Better question…what do stocks do in a Depression? Abelson said it well…there are so many bears now they must be wrong…it is possible they aren’t bearish enough.

  9. michael schumacher commented on Jan 14

    the games with the SPY has been going on for two years. Nothing new to me..just the reason for the rally’s are getting really pathetic which tells me they are running out of time. If the I-banks need billions of $$ every month just to make up the numbers it’s just a matter of time.

    The funniest story this morning is the Chinese having second thoughts about “investing” in C….IF they are apprehensive….LOL


  10. JohnnyB commented on Jan 14

    My favorite Luskin moment so far happened about six months ago when the markets were much higher and we just got out first pullback. Kudlow asked him what he was doing and Luskin said “Larry you see these” (holding up two fists) “I am buying with both of these”. The tragedy is it was more cheesy than it was wrong, an accomplishment that only Luskin can pull off.

    As much as I laugh at Luskin I have pure disdain for Jerry Bowyer. Everyone knows a Bowyer, the know-it-all-pompous bully that will drive you into the ground if you stand in opposition too but has very little facts to stand behind. Bowyer will twist your own words against you or create straw man arguments lumping you in with others to make himslef look smarter.

  11. Kopin Tan commented on Jan 14

    LIKE BEER BELLIES AND bald spots, a recession is one of those things whose precise beginning is hard to pinpoint — until the sad evidence eventually becomes hard to refute. The National Bureau of Economic Research defines a recession as two consecutive quarters of declining growth, and often calls recessions long after they’ve begun.

    As a leading economic indicator, the stock market begins pricing in a slowdown before one unfolds. Over 10 post-war recessions, the S&P 500 has slid by an average 4.27% in the year leading up to a recession, before slipping another 4.83% in the six months after one is officially called, notes Ned Davis Research senior analyst Ed Clissold.

    The average post-war recession has lasted 10 months. But stocks began to anticipate an economic rebound well before the recession’s end. A year after the recession’s official start, the S&P 500 has recovered enough to post an average 3.15% gain (although in 1973 and 1980, it was still down 27% and 18% a year after). That momentum typically continued, with the market up 14.35% a year after the recession ends.

    Against that historical yardstick, it might be tempting to see today’s 11% pullback as a sign that the worst damage is done. “But there are remarkable similarities and remarkable differences in economic cycles,” cautions James Melcher, who runs Balestra Capital — and positioned his portfolio defensively in recent months.

    In this cycle, “the credit market had absorbed the most massive influx of liquidity the world has ever seen, and that had distorted the pricing of risk,” Melcher says. “As a result, the coming correction may prove more severe than in previous cycles.”

    To gauge peak-to-trough slides surrounding recessions, Merrill Lynch economist David Rosenberg examined data from the four recent recessions that began in 1973, 1980, 1981 and 1990 (he excluded 2001 because that slide was worsened by accounting scandals and the Sept 11 attacks). On average, the S&P 500 fell 23% from its peak.

    The cyclical sectors absorbed the biggest peak-to-trough beatings: 31% for consumer discretionary, 30% for financials, 30% for technology, 29% for energy and 28% for industrials. In comparison, telecoms pulled back an average 18%, healthcare retreated 19%, and utilities fell 22%.

  12. Ironman commented on Jan 14

    First, some points of reference for those interested:

    NBER Recession Dates
    The S&P 500 at Your Fingertips

    The first link is the listing of recession dates as determined by the National Bureau of Economic Research, the second is a tool that provides historical data between any two months since January 1871 for the S&P 500, including the rates of return (with and without inflation, with and without reinvesting dividends.) These are the resources that anyone looking to find how stocks moved during periods of recession can use to find out for themselves.

    For those who are happier looking at charts, the key measure that shows the correlation between between periods of distress in the stock market and periods of recession in the U.S. economy is the price-dividend growth ratio (or G-ratio). Here’s the chart showing that correlation, and here’s the post it comes from. The links at the bottom of the post provide more background info….

  13. Grodge commented on Jan 14

    Wow, those returns aren’t as bad as I had figured. We are already at -8% on SPY and -14% on QQQQ since the market highs last fall.

    The technicals are still terrible, but maybe another 5-10% drop and I can cover some index shorts and look at some bargains?

    Unless Abelson is correct and this morphs into a full blown depression…

  14. michael schumacher commented on Jan 14

    Low and behold…….just as C and Mer are about to sell ALOT more watches in the dark of night…..the Dow rallies above the November low…..how do they do it???

    Rhetorical question ICYDK


  15. VJ commented on Jan 14


    The National Bureau of Economic Research defines a recession as two consecutive quarters of declining growth

    Actually, according to the NBER:

    “Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them.”

  16. VJ commented on Jan 14


    A depression is not a severe recession. They are two different metrics. The national economy went in and out of recession during the Great Depression.

  17. RichardN commented on Jan 14

    Motion to cap schumacher’s conspiracy related posts/rally whines to 3 per week. All in favor say “aye”.


  18. Old Ari commented on Jan 14

    Would you call this a “Bangalore Torpedo”?

  19. Grodge commented on Jan 14

    According to Wikipedia (I know, I know, but…):

    A severe or long recession is referred to as an economic depression.


    I’m not arguing, just wondering what to look for that would differentiate the two.

  20. la grande poussée commented on Jan 14

    Don’t you love Wikipedia….you just don’t have to argue or guess – the answer is there.

  21. Eric Sebille commented on Jan 15

    Nothing compares to Luskin being so sure back in April that the Fed would be raising rates come September. Then he put up a couple of articles in November calling a bottom on the market and financials on the trendmacro site. He is always quick to point out others predictions…At least he has been on calling energy and materials. Jerry Bowyer however, I must agree with the poster above, brings absolutely nothing to the table. I could get better economic analysis talking to my barber.

  22. VJ commented on Jan 15


    According to Wikipedia

    Well, there ya go.

    I could spend the rest of my waking life correcting just some of the nonsense on Wikipedia.

    A severe or long recession is referred to as an economic depression.

    Then how could the national economy have gone in and out of recession DURING the Great Depression ?

    There were periods of positive GDP during the Great Depression, when the national economy was not in recession. How could a depression be a ‘severe or long recession’ if it had positive GDP and was not in recession ???

  23. VJ commented on Jan 15


    To extend my remarks, Wikipedia and numerous other sources claim that the “Great Depression” lasted from about 1929 to 1939. I know it started earlier and it likely ended slightly earlier, but let’s use their definition.

    I agree with the classic definition of a recession as negative economic growth, or as the NBER puts it, diminishing economic growth.

    Consider the following:

    The GDP in 1934 was 10.8%.

    The GDP in 1935 was 8.9%.

    The GDP in 1936 was 13%.

    You see the problem.

    If an economic depression is supposedly a “severe or long recession“, how could the Great Depression have spanned from 1929 to 1939 with three years of an average double-digit growth smack in the middle ?

  24. A Dash of Insight commented on Jan 16

    Market Response to Recessions

    Each day the market gets new information about a slowing rate of economic growth. If the rate of economic growth slows enough, it can and will be interpreted as a recession, when the NBER does a retrospective analysis of the

  25. TKL commented on Jan 19

    Doubt anyone will see this late comment, but beware the data in those charts. The criteria for peaks and troughs in the S&P 500 are not clear, and more important, do not coincide with the peaks and troughs, and in fact systematically and substantially understate the peaks and overstate the troughs. Consequently, an investor would have had to endure much more psychological stress and far greater losses (at least on paper) than the charts suggest. And an investor today might think that the bottom is nearer than the true historical record teaches.

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