A look back at financial markets during past recessions

RUSSELL PRICE, CHIEF ECONOMIST - AMERIPRISE FINANCIAL

MARCH 15, 2023

Last year was one many of us would prefer to forget. Global financial markets had their worst year since 2008 as inflation surged and interest rates jumped. The world was still dealing with the vestiges of the COVID-19 pandemic while Russia’s war in Ukraine escalated tensions between the East and West.

The geopolitical stage remains a key concern as we close on the first quarter of 2023, but the worst could be behind us relative to financial markets. Inflation rates have been easing, central banks appear closer to ending their interest rate hikes than starting them, and equity markets seem to have a lot of negative prospects already priced in.

With this backdrop, we believe investors should approach the remainder of the year with a knowledge of market/economic timing, which is the historical relationship between economic activity, corporate earnings and equity markets, particularly during transition periods.

The markets and economy don’t always sync up

It may seem counterintuitive, but financial markets can often move lower during periods of economic expansion and higher during periods of economic stress. Last year, stock prices declined in anticipation of a potential economic recession and what would likely be a corresponding drop in corporate profits. This apparent mismatch in timing is largely reflective of the historical pattern whereby financial markets typically look forward by approximately 6 to 18 months in determining stock market values.

How the markets have performed during past recessions

The information below examines the economic/earnings/market timing as seen during a few key recession periods of the last 50 years.

Is the worst behind us for the markets? The economy?

If the historical data above holds true, better days may be ahead for the financial markets. However, investors will still want to mentally prepare for the possibility of market volatility on the horizon.

As far as the U.S. economy goes, many investors may be wondering — after almost a year of nonstop recession speculation — if a downturn will inevitably materialize in 2023. We could all be forgiven for experiencing some recession-talk exhaustion as some forecasters have been predicting an imminent economic downturn for more than a year now. In our view, the odds of a recession over the next year may be slightly over 50%, but if we do eventually see a recession, we believe it would be relatively shallow.