The R word-- just how scary is it for equity investors?

By Dr. Leila Heckman, PhD, March 13, 2020

If the latest global shock from the Covid-19 virus pulls the US into a recession, what might happen to equity returns? For a historical perspective, we looked at price returns of the S&P 6 months before a recession, during a recession, and 6 months after a recession. The monthly return data starts with the recession in October 1873. The monthly returns are from the Schiller database which calculates stock price data as monthly averages of daily closing prices. The dates of recessions are from the National Bureau of Economic Research (NBER) which is an American research organization well known for providing start and end dates for recessions in the United States. From the NBER website, “the NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Of course, in general, one does not know the exact dates a recession starts or ends until after it is over.

Below are the 3 graphs of the price returns of the S&P 6 months before a recession, during a recession, and 6 months after a recession.

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Six months before a recession, the price returns have averaged -1.3% with the range being -19.3% to 20.4%. During a recession, the price returns have averaged -8.0% with the range being -79.3% (the Great Depression) to 31.0%. Six months after a recession, the price returns have average 14.9% with the range being -4.5% to 69.8%. As can be seen from the 3rd chart, six months after a recession have resulted in positive price returns for the investor in 27 of the 29 of times: hence, 93% of the time.

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