I want to get this out right off the bat – recessions are a part of the business cycle, thus part of every investor’s investing life. They occur every 4-10 years, so we must expect them. Some clients and financial pundits feel that we are on the precipice of a new recession. Maybe so, but you may be surprised to learn that we often don’t know we were in a recession until it has nearly run its course! For example:
- Remember the Great Recession that began in December 2007? The economists at the National Bureau of Economic Research (NBER), who are basically the official scorekeepers of recessions, didn’t discover the recession until December 2008 – a year late, and only a few months before the episode (officially) ended.
- The previous recession began in March 2001 – but the NBER didn’t call it a recession until November 26th of that year. By amazing coincidence, that was actually the same month it ended (as they told us many months later).
- The recession that began in July 1990 wasn’t called until April the following year. The recession that began in July 1981 wasn’t recognized until January of 1982. (Source: Are We Already in a Recession?/Marketwatch)
What we all really want to know is, “How have stocks performed in and around these past recessions?” You may be surprised to learn that the S&P 500 has finished positive during four of the last nine recessions. Stocks were positive in six out of the past nine times in the year leading up to the start of a recession, dispelling the myth that the stock market always acts as a leading indicator of economic activity.
There are some other numbers shown in the above chart that are noteworthy.
- Stock market performance during the last 9 recessions has averaged -1.5%. In 8 of the last 9 recessions (throwing out the last one) stocks averaged +2.69% per recession.
- While performance of the market in the year prior to a recession is usually positive, the returns in the 1-year, 3-year, and 5-year periods have averaged 15.3%, 40.1%, and 78.7%, which is impressive. This is another compelling piece of evidence that investing in periods of unrest usually pays off, often handsomely, for investors.
- Market returns before, during, and after a recession are unpredictable and vary widely.
As difficult as markets are to predict, recessions seem to be even more difficult to forecast as proven by the fact that in numerous past recessions we didn’t even know when one had started until months after it began. Don’t fret about a coming recession. It will arrive one day and when it does, it won’t be the end of the world – not even close.
Strive to tune out the noise that the financial media puts out, which can tempt you to take some sort of action with your portfolio to avoid their predicted downturn. Don’t be that investor who thinks people on radio or TV can predict recessions, markets, or the weather. They can’t.