Stock Market Declines Associated with Recessions

August 20, 2011

U.S. recessions are inevitably associated with weakening share prices.  A recession from December 1969 to January 1970 saw the Dow Jones Industrial Average drop 35.9% from 985 on December 3, 1968 to 631 on May 26, 1970.  The next recession occurred between November 1973 and March 1975.  The DOW fell 45.1% from 1,052 on January 11, 1973 to 578 on December 6, 1974.  Two recessions separated by a year occurred in the early 1980s:  from January to July of 1980 and from July 1981 until November 1982.  The DJIA experienced a bear market, falling 24.1% from 1,024 on April 27, 1981 to 777 on August 12, 1982.  The following recession from July 1990 to March 1991 saw the DOW lose 21.2% from 3,000 on July 16, 1990 to 2,365 on October 11, 1990.  With the U.S. again in recession from March 2001 to November of that same year, the DJIA slumped 25.0% from 10,984 on February 1, 2001 to 8,236 on September 21, 2001.  And in the Great Recession from December 2007 until June 2009, the DOW index tumbled 53.8% from 14,165 on October 9, 2007 to 6,547 on March 9, 2010.

The table below juxtaposes these stock market declines with the peak to trough loss of real GDP.  The severity of the back-to-back recessions in the 1980s is overstated because in between those downturns, real GDP recovered 4.4% in just a year.  The net drop from before the first recession to the end of the second one in that sequence was only 0.7%.

Recession Drop in GDP Drop in Stocks
12/07 – 06/09 5.1% 53.8%
03/01 – 11/01 0.3% 25.0%
07/90 – 03/91 1.4% 21.2%
07/81 – 11/82 2.7% 24.1%
01/80 – 07/80 2.2%  
11/73 – 03/75 3.2% 45.1%
12/69 – 11/70 0.6% 35.9%


The two largest bear markets were associated with the two deepest recessionsHowever, the parallel weaknesses were not proportional.  The first Nixon recession had merely a 0.6% peak to trough decline in real GDP.  That was only 12% as severe as the Great Recession, but the associated bear market in share prices was two-thirds as severe as the bear market from October 2007 to March 2009.  Likewise, real GDP in the first Bush43 recession dipped only 0.3%, yet stocks fell almost half as much as they did in the Great Recession. 

A different matter to explore involves times when economic growth threatens to stall but fails to evolve into an outright recession.  Such an example occurred in the first half of 1995.  After expanding 4.8% annualized in the first half of 1994 and 3.6% in the second half of the year, U.S. real GDP increased only 0.9% annualized in the first half of 1995 but improved to a 3.1% pace in 2H95.  Stock prices were already in a multi-year bull market, rising 11.9% annualized from 3,625 to 3,834.  And when economic growth nearly stopped in early 1995, the DOW kept on rolling up the gains with a 41.2% annualized jump to 4,556 at midyear and a further 26.1% annualized advance in the second half of 1995 to 5,117 at yearend.  At least that time, investors somehow managed to differentiate a pronounced but temporary slowdown in growth from the onset of a genuine recession

Investors this time anticipate a recession, not a near miss.  The DOW plunged 15% in the four weeks and a day between July 21 and August 19.  Omitting the July 1981 – November 1982 recession, which was a resumption of the January-July 1980 downturn, the U.S. jobless rate at the start of the other six recessions examined for this article ranged from 3.5% in December 1969 to 6.3% in January 1980 and averaged 4.9%.  Unemployment currently stands at 9.1%, 5.2 percentage points above that mean. If the U.S. jobless rate climbs during the recession ahead by the average increase in those earlier recessions, that is 3.1 percentage points, it will equal 12.2% or greater by the time the next upturn begins, and the broad measure of un- and underemployment will be knocking at the 20% threshold. 

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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