From Peak to Valley: Historical S&P 500 Recessions

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To understand how the next recession might play out, I analyzed how the last 8 recessions played out. This analysis isn’t about how the recessions happened, but what were the price actions during that period. Currently, I’m working on a recession signal which first appeared in this post here, but I still have a strong feeling it’s overfitted.

Few questions I wanted to answer:

  • What was the % returns from peak to valley and how long did that bear market last?
  • Once the bottom was hit, how long did it take for the market to recover back to it’s former peak?
  • After it’s recovery, how long until it hit the start of the next recession + what were the returns in these periods?

Duration and Returns of Recession Periods

The first clear finding is the longer the bear market, the greater then downturn. Surprisingly, there’s a slight relationship here. It’s about 15% drop for every 6 months that we’re in a bear market.

Recessions vs. Recovery Durations

When looking at how long the recession lasted vs. how long it took to recover, there’s also a clear pattern. The longer the bear market, the longer it takes to recover. But most interestingly, it looks like for every year we’re in a bear market, it takes 2-3X times longer to recover.

For example, the 08′ subprime mortgage recession from peak to valley took 1.5 years. It took 4 years to recover back to it’s former peak; about 2.6X.

After Recovery, Years until Next Recession

Once the market recovered to it’s former peak, it looks like there’s about a 7 year bull market before the start of the next recession. The question however is whether Covid in March 2020 is considered a recession period since the recovery was so swift. Also another question is if we have fully recovered.

Inflation is almost hitting double digits, and the Fed’s are lining up a series of swift interest rate hikes. Also with the war overseas, there’s lots of uncertainty still in the market.

Though the market “recovered” from the March 2020 Covid lows, I’m not sure we’re out of hot waters yet. But if it truly has, if history was to repeat itself, we might have another 6-7 years of a bull run ahead of us.

The returns however varied between the periods. There isn’t a clear pattern of what the returns will look like after a recovery and thankfully but also unfortunately, there isn’t enough data points here to draw a clear conclusion.

An analysis idea in the future would be to understand why did some recessions last longer than others. For example, the Covid impact of March 2020 recovered as quickly as it did because the US government printed trillions of dollars and aggressively bought into the market. This paired with increased Federal funding for unemployment caused us to see the faster recovery to date.

Also, I wanted to look at how each sector was impacted during the recession and recovery periods. I know “timing” the market seems impossible but if the recession signs are clear, my question is where to park my cash without leaving it in a savings account. This might not be a SP500 specific analysis but other asset classes like commodities and bonds.

Lots to still review so hope you stay tuned for more to come!


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