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Characteristics of a Recession and Market Declines

Matt Ristuccia, MBA, CFA

Matt Ristuccia, MBA, CFA

Matt is Co-Chief Investment Officer

If we study the history of recessions and stock market declines we can see that the typical mild recession (slowdown) is a correction in the 20-30% range.  Many investors have a skewed view of recessions given that the last two were deeper than average.  The recession in 2000 started with bubble valuations and a commodity spike.  The recession in 2008 started with a commodity spike, an aggressive fed, and massive financial institutional imbalances.  We are seeing none of the above today.

                                                                                                                                                                                               Source: JP Morgan  

In addition, odds are still that we are in non-recessionary/cyclical bear market globally, but the risks of a mild recession (slowdown) have risen in recent weeks.  However, based on the data above, even in a mild recession a negative 20-25% return is what we would expect.  We were already 20% down from peak when the S&P 500 hit about 2350 in December.  Typically markets retest lows so don’t expect this volatility to abate quickly, but given the data above (as well as other indicators) we view this volatility as a chance to smartly reposition portfolios and take advantage of dislocations.

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