Analyzing S&P 500 Performance During Recessions Since 1975

The S&P500 performance during recessions offers insights for investors navigating uncertain times. Historically, the index has delivered an average annualized return of 9.08% since Feb 1975 to Sep 2024, however, during recessionary periods, this performance tends to vary significantly across different recessions.

Recently, the Sahm Rule Recession Indicator [1] was triggered, signaling a potential US recession on the horizon. This indicator, which activates when the three-month average of U.S. unemployment rises by 0.50 percentage points or more from its lowest point over the past year, has previously foreshadowed significant economic events like the COVID-19-induced recession in 2020, the 2008 financial crisis, and the dot-com bubble.

Our analysis highlights the importance of understanding these differences. While the S&P 500's expected return over 12 months following a recession averaged 8.56%, when the COVID-19 recession is excluded, this figure turns negative at -0.47. We excluded the COVID-19 period from the recession analysis because the recovery was primarily driven by government stimulus.

S&P 500 Performance Analysis

To explore the S&P 500's performance during economic crises, we conducted an analysis of historical data spanning from February 1975 to September 2024. We imported the Sahm Rule recession indicator data into AlternativeSoft database and utilized our conditional statistics feature to compare two periods: recessions period vs full period. Our analysis revealed the following metrics:

Table 1: Returns During Historical Recessions Since Feb 1975 vs Full Period Return

Source: AlternativeSoft

Key Insights

The analysis, using AlternativeSoft’s conditional statistics model, reveals that during recessions, the S&P 500 achieved a higher annualized return of approximately 10.57%, compared to 9.08%  over the full period. However, excluding the COVID-19 recession reduces the return to 6.42%.

Expected Return Analysis

In addition to analyzing conditional performance during recessions, we conducted a study on the expected 12-month performance of the S&P 500 by averaging all previous recessions since 1975. This analysis yielded an expected return of 8.56% for the S&P 500 in the 12 months following the start of a recession. This return provides a benchmark for investors to gauge potential returns during recovery periods.

Interestingly, when we exclude the COVID-19 crisis—the expected return shifts dramatically to a negative value of -0.47%. This negative expected return suggests that the S&P 500 may struggle to rebound following recessions that were not influenced by the extraordinary government interventions and fiscal stimulus that characterized the COVID-19 response. However, even with this slight negative expectation, the S&P 500 has historically shown resilience and an ability to weather economic challenges.

Conclusion

The analysis shows the S&P 500 delivered a 10.57% annualized return during recessions from Feb 1975 to Sep 2024, compared to 9.08% over the full period. Excluding the COVID-19 recession lowers this return to 6.42%, underscoring the impact of government stimulus.

Additionally, the expected 12-month return after a recession starts is 8.56%, but excluding COVID-19, it turns negative at -0.47%, suggesting future recoveries may be less certain without significant government intervention.

Curious about hedge fund strategy performance during past recessions? Check out our next article, "Hedge Fund Indices Returns During Historical Recessions," coming in October 2024. Follow us on LinkedIn for updates!

Reach out to AlternativeSoft by emailing information@alternativesoft.com to learn more about how AlternativeSoft can enhance your impact investment strategy and to discover how their platform can transform your approach to alternative investments.

[1] https://fred.stlouisfed.org/series/SAHMREALTIME