How Have Stocks Performed in Prior Recessions?

T. Rowe Price recently sent out an investor report that contained data from its own economists, the National Bureau of Economic Research and Ned Davis Research (NDR).   The report looked at the stock market's performance during past recessions and focused on the period post-1945.  Below are some of the highlights that might help investors navigate the market in this recession, however as the report cautions, its conclusions are averages that will not fit all bear markets or recessions.  They are, however, good signposts:

• Since 1945, recessions have had a median duration of 10 months.
• The market typically began declining several months before a recession and continued declining 5-6 months after it began.
• The stock market peaked about nine months (on average) before the start of a recession.  (By my calculations, this would put the start of the current recession in July).
• From the market peak before a recession, to the bear market low, the S&P 500 large cap stocks fell 23.6% on average.  (Applying the same percentage drop to the Dow's October 2007 high would put the bottom of the current bear market at about 10,716).

• The market usually begins rising half-way through a recession.  (By my calculations, this means that if the average recession is 10 months, and it started in July, that the market should start rising in December, if this bear market fits the typical recessionary pattern).
• After reaching a low, the S&P 500 had gained 24% six months later and 32% a year later. (Again, on average).
• During the early parts of a recession, small cap stocks underperform large caps.
• Six months into the recession, as the market begins to recover, small cap stocks typically outperform large caps significantly.  (i.e. small caps have a higher beta).

As T. Rowe Price's report notes, "The challenge for investors is that stocks begin to perform better before investors feel better."   And, as I conclude, if the current bear market follows the average pattern, this fall could be the bottom, and a time to buy.