S&p 500 and business cycle case study

S&P 500 and USA business cycle

Case study

Prepared by: Walid Saafan

Date: March 3, 2009

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IntroductionThis paper presents the relationship between S&P 500 index and the USA business cycle from year 1950 (the launch of S&P 500 index).

Studying the previous patterns with give us a good understanding of the correlation between the stock market and the business cycle as We will present in the coming sections.

Definition of Recession According to NBER The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement on how the NBER's Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03.

US Business Cycle Expansions and Contractions

Peak Trough Contraction ExpansionPeak Previous trough Trough from Peak from

to to Previous PreviousTrough this peak Trough Peak

J une 1899(I I I ) December 1900 (IV) 18 24 42 42September 1902(IV) August 1904 (I I I ) 23 21 44 39May 1907(I I ) J une 1908 (I I ) 13 33 46 56January 1910(I ) J anuary 1912 (IV) 24 19 43 32January 1913(I ) December 1914 (IV) 23 12 35 36

August 1918(I I I ) March 1919 (I ) 7 44 51 67January 1920(I ) J uly 1921 (I I I ) 18 10 28 17May 1923(I I ) J uly 1924 (I I I ) 14 22 36 40October 1926(I I I ) November 1927 (IV) 13 27 40 41August 1929(I I I ) March 1933 (I ) 43 21 64 34

May 1937(I I ) J une 1938 (I I ) 13 50 63 93February 1945(I ) October 1945 (IV) 8 80 88 93November 1948(IV) October 1949 (IV) 11 37 48 45July 1953(I I ) May 1954 (I I ) 10 45 55 56August 1957(I I I ) April 1958 (I I ) 8 39 47 49

April 1960(I I ) February 1961 (I ) 10 24 34 32December 1969(IV) November 1970 (IV) 11 106 117 116November 1973(IV) March 1975 (I ) 16 36 52 47January 1980(I ) J uly 1980 (I I I ) 6 58 64 74July 1981(I I I ) November 1982 (IV) 16 12 28 18

July 1990(I I I ) March 1991(I ) 8 92 100 108March 2001(I ) November 2001 (IV) 8 120 128 128December 2007 (IV) 73 81

BUSI NESS CYCLEREFERENCE DATES

DURATI ON I N MONTHS

CycleQuarterly dates

are in parentheses

Contractions (recessions) start at the peak of a business cycle and end at the trough.

Investment case study – S&P 500 and US Business Cycle | Prepared by: Walid Saafan

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The relationship between S&P 500 and US business cycle

(1). The S&P 500 is a leading indicator par excellence. Since the 1950s, the S&P 500 has always peaked before the peak of a business cycle, with one exception (1980 business cycle). The S&P 500 establishes a trough prior to the end of a recession without exception.

(2). The median percent decline of the S&P 500 from its peak to trough is 16.9%. In the first three business days of 2008, the S&P 500 is down nearly 7.0% from its peak in October 2007.

Analysis of US business cycle, S&P 500 and Unemployment rates

From 1950 tell 2007 There have been 10 recessions since 1948! Unemployment rate was the highest in the early

1980s, it was almost 11%! It is noticed that every time unemployment rate suddenly surged, there was a recession. Recessions in the US seem to last 6-9 months on average.


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1950s: From there it rose until the start of 1953, where a correction started 6 months before the

recession, where the SPX according to Northern Trust (NT) fell only 11 % from peak to trough. From then it only rose. The bottom here was 8 months before the end of the recession!

Late 1950s: The correction which took the SPX down 17% ended 4 months before the recession. As usual the UNEMPLOYMENT RATE rose suddenly, when the recession started.


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Early 1960s: This was a mild correction, despite recession.

It also ended 4 months before the end of the recession. BTW, note the extremely strong correction of the stock market in 1962, where there wasn't a recession at all!

Early 1970s: This was the end of the bull market period and many bear markets followed. SPX fell from early 1969 to mid 1970 and lost 27%! However it again recovered before the end

of the recession... and rose until 1973 when it then lost 43%!! It fell before the start of the recession, but rose again before the end.


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1980s: There were two recessions, in 1980 and again in 1981/1982. But each time the stock market again recovered before the end of the recession. The SPX lost 10%, and 18%, before the Great Bull Market started.

1990: The recession of 1990/1991 took the SPX down 14% and as usual the stock market recovered

before the end of the recession, or 5 months. Note that there was absolutely no influence from the stock market crash 1987 on the real world

economy! The unemployment rate only started to rise at the start of the 1990 recession!


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2001: Again the SPX corrected much earlier, than the recession started. However in this exceptional case it continued to fall, because of 911, IMO!

Conclusion, the stock market always recovers before a recession ends. In fact the market usually recovers, when it looks terrible (although it can always get worse...)!


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S&p 500 and business cycle case study

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