Analysis of Stock Market Returns During Previous Downturns 

The periods analyzed are:(1) the 1987 "Black Monday" Correction (2) The correction of 1990 associated with the Savings & Loan Crisis (3) The market downturn from 2000-2002 associated with the "Tech bubble" and 09/11. Please keep in mind that, particularly regarding the comparisons to non-U.S. markets, almost by definition these periods were particularly challenging for the U.S. markets. Non-U.S. markets have experienced their own unique periods of severe price declines.

DOMESTIC/FOREIGN DEVELOPED/EMERGING:

The aggregated data shows that during the periods analyzed, foreign developed markets were generally less volatile than both US and Emerging Market stocks in both up and down periods. There was about a 470 basis point difference between the average downturn between US and Emerging Stocks, which was lower than expected. While there were considerable correlation benefits for US investors investing in Emerging Market stocks during the recovery.

TAKE AWAY: The data do not support the notion that during crisis periods for the U.S. stock market, domestic stocks have exhibited less risk than foreign stocks.

GROWTH & VALUE:

During each of the three down periods, value stocks outpaced growth stocks. In two of the three recovery periods value stocks also bested growth stocks.

TAKE AWAY: In the periods analyzed, value stocks lost less and at times outperformed growth stocks in the recovery period. The data does not support a generalization that “growth stocks lead a recovery”.

QUALITY:

For all three time periods the and on average, higher quality stocks performed better on the downside while lower quality stocks outperformed six month after the trough.

TAKE AWAY: Evidence supports the notion that there has been a “flight to quality” in down markets, while lower quality names tended to outperform when risk appetites increased.

MARKET CAPITALIZATION:

The distribution of returns for various market capitalizations was skewed such that the average is not very telling. For example, in the first down market returns of the top and bottom performing quintiles were separated by 4.31% while the difference in the third down period was 120.1%.

TAKE AWAY: No reasonable conclusion can be drawn from Market Cap Quintile performance during down markets or the ensuing six month periods following the trough.

Dividend paying stocks outperformed non-payers in all three periods and the average during down turns, while non-dividend payers outpaced dividend payers over the following six month periods.

TAKE AWAY: Results from the analysis period are in-line with the notion that dividend-payers lost less but also offered limited upside participation.

SECTORS:

Information Technology tends to be the most volatile sector, leading all sectors in up markets and lagging all in the downturns. Utilities and Consumer Staples lost less but offered limited up-side potential. Telecommunications stocks underperformed most sectors in both up and down markets. Health Care was mixed as some industries within the sector (such as Service Providers performed well in down markets while Health Care Technology was the worst industry in a down market.)

TAKE AWAY: While sectors tend to be too broad for meaningful inferences, in general, cyclical stocks tended to outperform non-cyclicals in up markets and vice versa.

INDUSTRIES:

In general, industries performed in-line with expectations as top industries: In down markets, the best performers tended to be those less dependent on the business cycle: tobacco, utilities (water, gas, electric), household products and infrastructure. While technology related industries tended to be the worst. Following a trough, technology related industries were among the best performers while non-cyclicals were among the worst performing.

TAKE AWAY: As expected, in general, the most volatile cyclical industries offered the best return on the upside and worst on the downside, while the least volatile non-cyclicals tended to outperform in down markets and vice versa.

CONCLUSION:

There are too few data points examined to make sound inferences as to which stocks will lead and which will lag during a downturn and recovery. While past may not necessarily be prologue and inflection points are difficult to predict, we hope this has analysis has shed some insight on how stocks have behaved during past downturns.

TAKE AWAY: Based on the analysis periods:

(1) In U.S. stock market crises, domestic stocks are not necessarily less vulnerable to losses than foreign stocks. Foreign and emerging markets stocks can also provide diversification benefits in both up and down markets.

(2) In the periods studied, value stocks lost less and outperformed in two of the three recovery periods examined.

(3) No reasonable conclusion can be drawn from Market Cap Quintile performance during down markets or the ensuing six month periods following the trough.

(4) During the periods examined, dividend-payers lost less than non-dividend payers but, also experienced less upside participation.

(5) During the periods examined, Sectors tend to be too broad to make inferences, but the most cyclical tended to outperform following a trough and underperform on the downside. More pointed industries tended to behave in-line with relative expectations.

Appendix

The Russell 3000 Index measures the performance of the 3,000 largest US companies based on total market capitalization, which represents approximately 98% of the investable US equity market.

The Russell 3000 Value Index measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 3000 Growth Index measures the performance of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.

The Morgan Stanley Capital International (MSCI) EAFE Index is a market capitalization weighted index that monitors the performance of stocks from Europe, Austrailasia and the Far East

The Morgan Stanley Capital International (MSCI) Emerging Markets Index is a market capitalization weighted index that monitors the performance of stocks from 27 emerging market nations. Designation as an emerging market nation is determined by a number of factors including: gross national income per capita, market depth and liquidity, local government controls and general perception by the investment community.