With activity in many industries sharply curtailed in an effort to reduce the spread of COVID-19, some economists say a recession is inevitable, if not already in action. From a market perspective, we have already experienced a drop in stocks, as prices have likely incorporated the growing chance of recession.
As investors, you may be tempted to abandon equities and go to cash because you fear the implications of a recession. That’s only natural. You may also want to wait it out before putting new savings in the investment plan. Sure, that makes sense.
It’s important to keep in mind that across the two years following a recession’s onset, equities have a history of positive performance. Data covering the past century’s 15 US recessions show that investors tended to be rewarded for sticking with stocks.
Exhibit 1 below shows that in 11 of the 15 instances, or 73% of the time, returns on stocks were positive in the two years after a recession began. The annualized market return in the two years following a recession’s start averaged 7.8%.
Growth of wealth calculated for the 24 months after the peak month of the business cycles as identified by the National Bureau of Economic Research (NBER). Sample includes 15 recessions as identified by the NBER from October 1926 to December 2007. NBER define recessions as starting at the peak of a business cycle.
Recessions understandably trigger worries over how markets might perform. But history can be a comfort for investors wondering whether now may be the time to move out of stocks.
Stick to your long-term plan, and you’ll see the benefits.
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