Some may believe, as did the Biden administration, that employing the “R” word is premature. Investors should want a recession to be underway rather than beginning later. If we’re in a recession, there’s some good news for investors.
Stocks rebound faster than the economy
Yes, the stock market takes a dive during a recession. That’s always been the case throughout history in recessions. Without exception. However, it’s vital to note that stocks frequently recover faster than the economy itself.
For example, the worst recession in history may be considered to have begun in mid-1981 and continued through much of 1982. Back then, the Federal Reserve jacked interest rates up as fast as they could to combat rising prices. We’re seeing similar efforts today.
The S&P 500 began to recover months before the recession ended. The index was even higher before the recession had run its course than it was before the recession started.
Investors are forward-thinking. They have the ability to perceive signals of a firm’s performance improving in advance of these signs materializing in economic data. As a result, purchasing pressure that drives the stock market higher frequently precedes the end of a recession.
Historical post-recession performance
Following recessions, the stock market has historically done well. Investors have a lot to be pleased about, according to some research by Kristen McKenna, Managing Director of Darrow Wealth Management in Boston.
McKenna examined all of the U.S. recessions since 1953 through the current COVID-19 recession. During that time, the stock market provided positive gains in the six months after a recession ended approximately 82 percent of the time. The average return was 7%, but there was even better news.
The stock market has a positive return 91% of the time in the year following a recession, with an average return of 16%. The only time during which stocks didn’t produce good returns within a year after the end of a recession was in 2001, when the dot-com bubble burst.
According to McKenna, stocks generally performed worse during the year preceding a recession than they did during the recession itself. If we’re in a recession right now, this may bring at least some level of comfort to investors.
An investor’s best friend
Of course, the greatest investors look at things from a longer-term viewpoint rather than viewing only recessions and their immediate consequences. They consider downturns to be windows of opportunity.
Warren Buffett is an excellent example. “The Oracle of Omaha,” as he is known, wrote in 2008, “Bad news is a savvy investor’s best friend. It enables you to purchase a piece of America’s future at a bargain price.”
We’ll most likely learn whether the US is in a recession soon. Even if it is, there may still be a silver lining for investors. The sooner a recession begins, the faster it will end.