Stocks for the Long Run : the Definitive Guide to Financial Market Returns and Long-term Investment Strategies

markets coincided with expanding war economies, there have been 12
episodes since 1802 when the cumulative returns index for stocks fell by
8 percent or more, but the drop was not then followed by a recession
within the next 12 months. This happened five times in the nineteenth
century and seven times in the twentieth century. All the occasions in
this century have occurred since World War II.
Declines greater than 10 percent in the Dow Jones Industrial Aver-
age during the postwar period that were not followed by recessions are
listed in Table 12-2. The 1987 decline of 35.1 percent from August
through early December is the largest decline in the near-200-year his-
tory of stock returns data after which the economy did not fall into a re-
cession. Chapter 16 will discuss the 1987 stock crash and explain why it
did not lead to an economic downturn.
The trough in the stock return index and the trough in the NBER
business cycle are compared in Table 12-3. The average lead time be-
tween a market upturn and an economic recovery has been 4.8 months,
and in 8 of the 10 recessions, the lead time has been in an extremely nar-
row range of 4 to 6 months. This compares to an average of 5.7 months
that the peak in the market precedes the peak in the business cycle; this
peak market to peak economy lead time also has shown much greater

212 PART 3 How the Economic Environment Impacts Stocks

TABLE 12–1

Recessions and Stock Returns

1948-1949May 1948 Nov 1948 6 -8.91% -9.76%

1953-1954 Dec 1952 Jul 1953 7 -4.26% -9.04%

1957-1958 Jul 1957 Aug 1957 1 -4.86% -15.32%

1960-1961 Dec 1959 Apr 1960 4 -8.65% -8.65%

1970 Nov 1968 Dec 1969 13 -12.08% -29.16%

1973-1975 Dec 1972 Nov 1973 11 -16.29% -38.80%

1980 Jan 1980 Jan 1980 0 0.00% -9.55%

1981-1982Nov 1980 Jul 1981 8 -4.08% -13.99%

1990-1991 Jul 1990 Jul 1990 0 0.00% -13.84%

2001 Aug 2000 Mar 2001 7 -22.94% -26.55%

Average 5.7 -8.21% -17.47%

Recession

Peak

of Stock

Index

(1)

Peak

of Business

Cycle

(2)

Lead Time

Between

Peaks

(3)

Decline in

Stock Index

from (1) to (2)

(4)

Maximum 12

Month Decline

in Stock Index

(6)