In the above chart, 43 years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large caps are outperforming smaller companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. Small-caps have historically peaked versus large-caps in late-May to early June and tend to underperform until sometime in the fourth quarter.

Compared to S&P 500 or Russell 1000, the Russell 2000 has modestly underperformed this year. As of Friday, July 15 close Russell 2000 was down 22.31% year-to-date compared to –18.95% for S&P 500 and –19.93% by Russell 1000. Despite declining less today, Russell 2000 is likely to continue to underperform through the remainder of the third quarter before reversing course sometime in Q4.

A recession has widely been defined by many economists as two consecutive quarters of decline in GDP. Whether or not you are a glass half-full or half-empty person, Q1 U.S. GDP was negative which does satisfy half of that definition. More recently the Federal Reserve Bank of Atlanta’s GDPNow model’s estimate for Q2 U.S GDP is also negative. In an effort to gain a better understanding of the market’s performance before, during and after recessions we have compiled the following table.

Dates for U.S recessions were sourced from the National Bureau of Economic Research (NBER). Since 1945, there have been 13 U.S. recessions. The most recent and shortest was the result of Covid-19 and began in February 2020 and ended two months later in April. The longest recession post WWII was caused by financial crisis in 2008-2009 and lasted 18 months. The average duration of a recession has been 10.2 months.

Historically, in the 1-year period prior to the start of the recession, S&P 500 has been positive 53.8% of the time with an average gain of 4.12%. In the table above, the year before the recession began is calculated using monthly closes. For example the 1-year prior to the Covid-19 recession was calculated using the close from January 2019 through the close of January 2020. During recessions S&P 500 historically advanced 46.2% of the time but with an average loss of 1.22%. Once the recession ended S&P 500 generally tended to soar 14.45% on average higher over the next year with gains occurring 84.6% of the time.

Today’s hotter than anticipated CPI reading of 9.1% was the highest since 1981 leading to the speculation that the Fed could actually raise rates later this month by a full percentage point. Historically, higher interest rates have not been all that kind to NASDAQ and its high concentration of growth stocks. The increase in rates thus far this year has already resulted in a sizable decline for NASDAQ, down 28.1% year-to-date as of today’s close. When coupled with the historically weak track record of NASDAQ in past midterm years, the immediate outlook further dims. However, as you can see in the 1-Year Seasonal Pattern chart of NASDAQ above, NASDAQ has typically found a seasonal low in early October in past midterm years.