The Investment Scientist

How have stocks performed coming out of a recession

Posted on: September 30, 2009

The recession is very likely over.” – Fed Chairman Bernanke on 9/15/09.

What does the fed chairman’s statement mean for stocks, if indeed the worst recession since 1929 is over? We don’t know for sure. We can, however, let history be our guide.

In this spirit, I studied the one-year and three-year returns of the S&P 500 Index and the Fama/French Small Cap Value Index coming out of a recession for the nine recessions since 1950.

End of Recession

S&P 500

1-year return

S&P 500 3-year return

Fama/French

SCV 1-year return

Fama/French

SCV 3-year return

May 1954

23%

54%

13%

93%

Apr 1959

31%

48%

60%

101%

Feb 1961

8%

20%

16%

42%

Nov 1970

2%

18%

12%

99%

Mar 1975

20%

4%

54%

133%

Jul 1980

7%

37%

30%

153%

Nov 1082

16%

35%

54%

197%

Mar 1991

10%

24%

29%

89%

Nov 2001

-23%

-2%

1%

87%

Average

10%

26%

30%

100%

Standard Deviation

15%

19%

22%

31%

For the S&P 500 Index, only one (out of the nine examined in the table) registered a negative return in the one- and three-year period after a recession. The average one-year return after a recession is 10%; the average three-year return after a recession is 26%. These return figures, however, are not statistically significantly different from zero. So it is prudent to conclude that the S&P 500 Index will likely have a positive year (three years) coming out of this recession, but that is by no mean a sure thing.

The Fama/French Small Cap Value Index did a lot better; the average one-year return after a recession is 30%; the average three-year return is 100%! The return figure for the 3-year return is statistically significant. Furthermore, the odds strongly favor the Fama/French Small Cap Value Index outperforming the S&P 500 in the next three years.

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3 Responses to "How have stocks performed coming out of a recession"

[…] Check out my new study – How have stocks performed coming out of a recession. […]

Intersting article, Michael!

I am no expert but from a novice’s perspective, I remember that coming out the 2001 recession was more about the stock market specifically because of the hyper-overvaluation of the dot-com companies. Which I think explains the negative growth in stock market although the economy was recovering.

2009 could also be about stock market because of the fact that the market took a hit about a year ago due to the banking industry’s problems and has now almost recovered from those losses. My latest 401k statement shows only -7% yearly growth which is not bad. (Almost all my investments are blue-chip.) I have seen 15 to 20% quarterly growth in my portfoliof in the last couple of quarters. So I could be optimistic and say that the market could actually grow at 15 to 20% range.

Also, I think the average is really not a good indicator here as the swings are so wide. Most of these recessions have their unique “economy versus stock market” dynamic which has to be taken into account.

Bhavesh.

[…] Why change title? How have stocks performed coming out of a recession […]

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

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