After a tough 2022 for stocks and bonds, many are worried that a recession could cause markets to decline further. While this is certainly a possibility, our friends at Dimensional Fund Advisors have compiled some research regarding the timing of recession announcements, as defined by the National Bureau of Economic Research, and US market lows. The results may surprise you.
While talk of a recession can be discomforting, history shows that often the worst has already passed.
- Equity markets have seen a much-welcomed reprieve recently with broad US, International, and Emerging Market indices up 11.6%, 15.3% and 6.9% QTD through 11/11/2022*. However, looming recession headlines continue to spark angst with investors, who may be wondering what the impact might be if one does occur.
- The National Bureau of Economic Research (“NBER”) defines a recession as a significant decline in economic activity that is spread across the economy and that lasts more than a few months** . However, the NBER’s official recession announcements are delayed from the actual recession periods.
- The global financial crisis offers an example of how markets incorporate expectations ahead of official recession announcements. Exhibit 1 below shows the performance of the S&P 500 index from 2007-2010. The grey shaded area represents the actual time period of the recession (December 2007-May 2009), and the yellow circles indicate the dates when the NBER announced the beginning and ending of the recession, December 2008 and September 2010, respectively.
Exhibit 1: US Recession and Stock Market Performance During the Global Financial Crisis***
S&P 500 Index, January 2007 – December 2010
- If we look at the recessions going back to the beginning of 1980, when the NBER began officially announcing recessions, two-thirds of the time the market had already reached its bottom prior to the formal NBER announcement as shown in Exhibit 2 below.
Exhibit 2: Recession Announcements vs US Stock Market Lows
*The US market is measured by the Russell 3000; the International market is measured by the MSCI World ex USA, and the Emerging market MSCI Emerging Markets indices.
***Start and end dates of US recessions, along with announcement dates, are from the National Bureau of Economic Research (NBER). nber.org/research/data/us-business-cycle-expansions-and-contractions and nber.org/research/business-cycledating/business-cycle-dating-committee-announcements