Swedroe: Stock Performance In A Recession

September 22, 2014

  • The typical recession lasts almost four quarters and is associated with an output drop (decline from peak to trough) of roughly 2 percent.
  • Severe recessions are more costly, with a median decline of about 5 percent, and last a quarter longer.
  • While typical recessions tend to result in a cumulative loss of about 3 percent, severe recessions cost three times more.
  • Recessions tend to be highly synchronized across countries and often coincide with contractions in credit and declines in asset prices.
  • Episodes of credit crunches, house price busts and equity price busts last much longer than recessions. The average duration of a credit crunch is around 10 quarters. An asset price bust is usually even longer, with an average duration of 18 quarters in the case of house price busts and 12 quarters in the case of bear markets.
  • A much larger decline in the growth rate of investment compared with the growth rate of consumption is a feature both of recessions and of credit crunches and house price busts.
  • While the typical house price decline is only 6 percent, the average decline is 11 percent due to some very large declines in the sample. During a house price bust, prices decline by about 29 percent.
  • While equity prices start falling before the onset of a house price bust, they usually begin to recover within two years of that event.
  • Credit growth experiences a large slowdown and does not return to pre-bust levels for at least three years.
  • Recessions with house price busts result in more adverse outcomes than those without such busts.
  • Although recessions associated with equity price busts tend to be longer and deeper than those without equity busts, these differences are not statistically significant.

One of the most important findings was that credit crunches and house price busts are more costly than equity price busts, as equity price busts are less consistently associated with real sector outcomes.

The important takeaway is that the track record of economists’ ability to forecast recessions is poor, and there hasn’t been much—if any—advantage from timing the market, even if you happened to know exactly when a recession would begin and end. As a result, trying to time the market based on forecasts of recession doesn’t seem to be a prudent strategy.

Larry Swedroe is the director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.


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