How has the stock market historically fared during U.S. recessions?

Executive summary

• Excluding the pandemic-induced recession of 2020, the correlation between U.S. stock market returns and GDP changes is near zero. 
• In 16 of the 31 recessions that have struck the U.S. since the Civil War, stock-market returns have been positive. In the other 15 instances, returns have been negative.
• We believe that a diversified, multi-asset portfolio can help investors better weather market drawdowns.

Many investment strategists are forecasting that the U.S. economy could experience a recession in the next year or two. The end of the previous recession, the COVID-19 crisis, was April of 2020. The period from July of 2009 to February of 2020, 10 years and eight months, was the longest economic expansion on record.

Is there a correlation between the economy and stock market performance?

The National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, industrial production and wholesale-retail sales." This is a broader version than the older, more mechanistic NBER definition of a recession, which qualified "two consecutive quarters of decline in real GDP" as a recession. Looking at the 31 recessions between 1869 and 2022 as we do in our full report, the correlation between U.S. stock market returns and GDP (gross domestic product) changes over the 31 recessions is 0.30. This positive correlation is mostly driven by the 2020 recession, where GDP dropped 17.8% on an annualized basis and the market lost 63.4% on an annualized basis. Excluding this period, the correlation is near zero.

How long do recessions with positive market returns typically last?

There have been 16 recessions which had positive stock market returns—as measured from the start to the end of each recession. These positive-market recessions lasted on average 16 months, with stock returns ranging from 38.1% to 0.02%, with an annualized cumulative return of +9.8% and an average GDP decline of -2.7%.*

How far in advance of a recession do markets tend to peak?

U.S. stock market peaks and troughs are often independent of the beginning and ending of recessions, with peaks occurring as early as 22 months before the start of a recession. On average, the U.S. stock market peaks five months before the start of a recession. In 2020, the market peaked on Feb. 19, nine days before the official start of the recession.

How long do recessions with negative market returns typically last?

The 15 recessions with negative returns lasted 17 months on average, with an annualized cumulative return of -14.8% and average GDP decline of -4.6%. The Great Depression from August 1929 through March 1933, a duration of 43 months, had a total U.S. stock return of -73.6% and was the worst economic downturn on record.

Can a multi-asset portfolio can help investors weather the storm

An investor would certainly like to dampen exposure to these drawdowns, but how? In order to beat a buy-and-hold return of 9.1% over the 154-year period, an investor would have to successfully predict 70% of the market turns—and move in and out of stocks/cash as appropriate.

We believe a better way to limit drawdowns in general is to maintain a multi-asset portfolio—a well-diversified portfolio of major asset classes, including alternatives—and then rebalance regularly to investment policy weights. The policy weights should be reviewed periodically and adjusted to meet the investors liability or other long-term obligations.

*Source: Adam Field, Evgenia Gvozdeva and Eric Thaut, "U.S. Stock Markets During Recessions", Russell Investments Research, April 2023.