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Stocks and Recessions: Assessing Recent History

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07/26/2020 | 12:15pm EDT

By Paul Vigna

A look at the performance of U.S. stocks through recent recessions holds some clues about where markets might go next...and also some warnings.

Stocks are rallying, with the technology-heavy Nasdaq Composite recently hitting a record and the S&P 500 standing just 3% from its highest level ever. Yet when investors get their first look at U.S. gross domestic product for the second quarter Thursday, it probably won't be pretty. The economy likely contracted by nearly 32%, according to economists surveyed by The Wall Street Journal. That would be the worst contraction on record.

That leaves some analysts asking: Does the climb in stocks point to the recession's end? Or have investors gotten ahead of the economy?

The performance of the S&P 500 through the past five recessions presents a mixed bag. Sometimes, the market does point to the direction the economy is headed. In three of the past five recessions dating back to 1980, the stock market was higher before the recession ended.

During the 1980 recession, which ran from January through July, the S&P 500 rose about 15%. That was the strongest recessionary performance for the broad index over the past 40 years. In the 1981-82 recession, the S&P 500 fell from July 1981 through August 1982 but then rallied. By the time the recession ended in November, the index was up 6.7% from the downturn's start.

The S&P 500 posted worse results during the two most recent recessions. In the 2001 recession, which lasted from March to November -- a period that included the Sept. 11 terrorist attacks -- the S&P 500 lost 8.1%. In the 2007-09 recession, which included the 2008-09 financial crisis, the S&P 500 was still down nearly 38% when the recession ended.

"We have to keep in mind that the stock market is not the economy," said Gregory Daco, chief U.S. economist at Oxford Economics. "The stock market can have long movements completely disconnected from any sense of economic reality."

Investors appear to be betting the current recession has bottomed out. The S&P 500 has climbed about 40% from its year low and now stands slightly higher than its level at the beginning of February, when the recession officially began.

Recent data, though, indicate the economic rebound is stalling.

"What's really happening now is we're seeing a plateauing of real-time data," Mr. Daco said.

The National Bureau of Economic Research, the official arbiter of recession dates, looks at a range of data beyond GDP. One figure is worth watching: incomes, particularly signs of peaks and troughs in wage growth.

A key measure the NBER uses to track incomes is personal income excluding transfer receipts i.e., government benefits like unemployment. This series is even more notable this time around, given this year's government stimulus.

In almost every recession, that figure bottoms out right around the time the NBER eventually marks the start of a new expansion. The only real outlier was in the last recession. The NBER said it ended in June 2009, but incomes didn't bottom out until October.

This year, incomes hit a low in April. They were up somewhat in May. Is that the start of a new push higher? The first hint of an answer comes with the June figures, which are scheduled for release Friday.

So while Thursday's GDP report will get most of the attention, some analysts said Friday's report on incomes could prove more important for investors.

"It's not a number anyone really thinks about, but it's important," said Nicholas Colas, the co-founder of DataTrek Research. "When incomes start to get less bad, you're not in a recession anymore."

Write to Paul Vigna at paul.vigna@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL 0.68% 27386.98 Delayed Quote.-4.68%
NASDAQ 100 1.27% 11267.084861 Delayed Quote.29.02%
NASDAQ COMP. 1.00% 11108.070638 Delayed Quote.23.80%
S&P 500 0.64% 3349.16 Delayed Quote.3.66%
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