Trends in small - and large-cap stocks during recessions

Christian J. Galipeau

Christian J. Galipeau
Senior Investment Director, 09/24/20

Studying market history may help provide a useful framework for investors as we navigate the recession of 2020. We looked back at the 5 recessions since 1980 as a guide.

In our research, we used the National Bureau of Economic Research (NBER) based Recession Indicators1. This time series, which has data going back to the end of 1854, is an interpretation of the U.S. Business Cycle Expansions and Contractions and is often used to officially denote when the U.S. economy is in a recessionary or expansionary period.

Using the common history between the NBER data and the launch of the Russell indices in January 1979, we can officially identify five recessionary periods, which troughed at the following dates (not including the current recession):

(1) July – 1980

(2) November – 1982

(3) March – 1991

(4) November – 2001

(5) June – 2009

With those dates identified, we next looked at the performance of both the Russell 2000 (small cap) and Russell 1000 (large cap) indices. For simplicity, performance of small and large was assessed on a relative basis, noted as Small relative to Large (Small/Large).

In charting the five individual cycles, the Small/Large level was rebased to 100 at the official end of each recessionary period. The cumulative growth of Small/Large was plotted starting 12 months prior to the official end of the recession and through the next 60 months (five years) post. This illustrates the historical relative performance of Small/Large in the months leading up to and during the recession, but also, the subsequent recovery. Each of the individual cycles are displayed in Exhibit 1.

We then built the Archetypal Path, which is the average of the individual paths. We observe that small cap stocks tended to underperform large cap stocks in the months leading up to and during a recession, as evidenced by the downward trending line. However, small caps begin to trough and start to outperform large cap several months prior to the official end of a recession. Small cap outperformance versus large cap lasted approximately 36 months on average after the official end of a recession. The data show that small caps outperformed by 15.74% on a cumulative basis (or 5% annualized). Exhibit 2 shows the Archetypal Path.


Looking back at the recessions of 1980, 1982, 1991, 2001 and 2009, large-cap stocks tended to outperform small cap in the months going into and during the early part of a recession. As the economy exits a recession, small caps tended to outperform large cap for the next three years.

1Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 18, 2020.

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