Long-Term Investors, Don’t Let a Recession Faze You
You don’t have to look far to see talk of a looming recession. But while economic downturns can be worrying, research shows share prices generally fall well before a recession begins and recover well before it ends. And average returns have been positive two years after a recession’s onset.
Investors may be tempted to abandon equities and go to cash when there is a heightened risk of recession. However research has shown that share prices incorporate these expectations and generally fall in value well before a recession even begins.
Across the two years that follow a recession’s onset, equities have a history of positive performance. Data covering the past century’s 16 US recessions show that investors tended to be rewarded for sticking with stocks. In 12 of the 16 instances, or 75% of the time, returns on shares were positive two years after a recession began (see Exhibit 1). The average annualized market return for the two years following a recession’s start was 8.8%. Looked at another way, a $10,000 investment at the peak of the business cycle would have grown to $12,145 after two years on average.
Recessions understandably trigger worries over how markets might perform. But a history of positive average performance following a recession can be a comfort for investors wondering whether or not they should move out of stocks.
Markets Don’t Wait for Official Announcements
Some investors may worry about the stock market sinking after a recession is officially announced. But history shows that markets incorporate expectations ahead of the news.
The global financial crisis offers a lesson in the forward-looking nature of the stock market. The US recession spanned from December 2007 to May 2009 (shaded area).
But the official “in recession” announcement came in December 2008—a year after the recession had started. By then, stock prices had already dropped more than 40%.
Although the recession ended in May 2009, the announcement came 16 months later, by which time US stocks had rebounded.
Investors who look beyond after-the-fact headlines about markets and the economy and stick to a plan may be better positioned for long-term success.
Exhibit 1 Notes
Past performance is not a guarantee of future results. Data presented in the growth of $10,000 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.
In USD. Performance includes reinvestment of dividends and capital gains. The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant recession start date. Sample includes 16 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to February 2020.
NBER defines recessions as starting at the peak of a business cycle.
Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French website
Exhibit 2 Notes
Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
In US dollars. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Start and end dates of US recessions, along with announcement dates, are from the National Bureau of Economic Research (NBER). nber.org/research/data/us-business-cycle-expansions-and-contractions and nber.org/research/business-cycle-dating/business-cycle-dating-committee-announcements
Stock price decline of more than 40% from December 2007–December 2008 is based on the S&P 500 Index’s price difference between the actual start of the recession in December 2007 and the official “in recession” announcement 12 months later.
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