By
Derek Hamilton
August 13, 2024
Global equity markets have weakened recently, driven by rekindled fears of a US recession and talk of a Federal Reserve policy mistake. We have recently written about market risks in a late-cycle economy, and these continue to be relevant. If a US recession occurs, we believe it is unlikely to be severe. However, related equity market performance would not necessarily match the severity of a downturn.
According to our analysis of recessions from the post-World War II period onward, gross domestic product (GDP) fell slightly more than 2% on average, while the S&P 500® Index suffered an average decline of roughly 25%. Even though there’s a sizable gap between those averages, the spread in performance between GDP contraction and the S&P 500 Index during recessions can vary wildly over time.
In the highlighted portion in the chart below, you can see that the smallest economic decline in post-war history occurred during the 2001 recession, when GDP fell by less than 0.5%. During that same period, however, the S&P 500 Index, which had peaked several months before, fell by more than 40%.
Many factors can impact the magnitude of stock market declines around recessions, including economic growth, interest rates, market valuations, and corporate profits. Sometimes, markets are impacted by extraordinary derailments such as corporate scandals. Whether the most recent market volatility is a temporary correction or something more severe, we believe active managers can play a key role in navigating these complexities.
Real GDP and the S&P 500 Index
Peak-to-trough declines during recessions
Sources: Macquarie, Macrobond, US Bureau of Economic Analysis (BEA), S&P Global.
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