Why Recession Stock Returns Aren’t Worth the Worry

Why Recession Stock Returns Aren’t Worth the Worry
Theodora Lee Joseph, CFA

4 months ago1 min

Earnings season is here, and the vibe isn’t great. Although the results haven’t been atrocious, some have hinted at early signs of a recession. But this shouldn’t have you running to hide under the covers: in the past 100 years, recessions haven’t been that bad for investment returns.

In the two years following the start of a recession, stocks actually tend to perform pretty well, on average showing a solid annualized return of 8.8%. Think about it this way: if you invested $10,000 right at the peak of an economic boom, on average, you’d have $12,145 in your pocket after two years. If you invested the same amount at the start of a recession, you’d have roughly $11,664 after two years, at those average recessionary returns. Simply put, it’s safe to say that history suggests sticking with stocks often pays off for investors.

This should tell you a lot about how savvy markets are. See, stock prices tend to drop in value before a recession even starts. In the US, stock market peaks tend to happen long before a recession begins – as long as 22 months before, but on average about five months before. It’s tempting to try to play it safe by pulling your money out of the market before a recession, but timing the market tends to be a losing game.

Recessions are part of life, and the important takeaway is to remain invested, even when recession fears are high. If you’re concerned about a market downturn, consider low-cost investment options like buffer funds or defined outcome funds that work like a safety net to protect you against market falls. You can find out more about them here.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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