It can be gut-wrenching to be an investor in the time frame before and during a recession. The markets can seem to go completely haywire, leading many to swear off of investing completely, at least for a while. But don’t be so quick to hit the eject button and pull the ripcord on your parachute! If you do, you could be doing yourself a massive disservice. Here’s why.
The Markets are Cyclical
Recessions are as much a part of the economic cycle as booms, and markets tend to behave in a similar manner, ebbing and flowing in response to world events. Stock markets tend to be forward-looking, meaning they price in the expectation of things that are likely to happen in the future, before it has happened. This means that, when people are calling for a recession, as they are right now, markets will decline as people sell their investments in preparation for that recession.
But what happens when the recession shows signs of ending – or it doesn’t materialize at all?
That’s right: markets will increase in expectation of brighter days ahead, even before those brighter days show up. If you panic and sell everything during a recession, then you’re selling low (everyone else already sold in anticipation of the recession). If you wait until the economy is confirmed to be improving, then you’ll be buying high, which is the exact opposite of what you should be doing.
Ideally, when everyone else is running for the hills as they prepare for a recession, you’d be going against the grain and buying. But if you don’t have the stomach for that – no shame, many don’t – then at least try and hold on to what you do have, and avoid selling. If you can hang on, you’ll often be rewarded with some really strong returns, as we’re about to see.
S&P 500 Returns Around a Recession
Below is a table that shows the average return of the S&P 500 during for period around a series of recessions: 3 months before the recession ends, and 1, 3, and 5 years after.
| Recession Beginning and End Dates | S&P 500 Index 3 Months Before Recession End Date | S&P 500 Index 1 Year After Recession End Date | S&P 500 Index 3 Years After Recession End Date | S&P 500 Index 5 Years After Recession End Date |
| Aug. 1957 – Apr. 1958 | 3.2% | 37.2% | 66.1% | 89.3% |
| Apr. 1960 – Feb. 1961 | 15.2% | 13.5% | 34.8% | 67.7% |
| Dec. 1969 – Nov. 1970 | 8.0% | 11.3% | 20.4% | 24.8% |
| Nov. 1973 – Mar. 1975 | 23.0% | 28.3% | 21.6% | 54.8% |
| Jan. 1980 – Jul. 1980 | 16.0% | 13.0% | 56.0% | 100.0% |
| Jul. 1981 – Nov. 1982 | 17.5% | 25.5% | 66.4% | 102.4% |
| Jul. 1990 – Mar. 1991 | 14.5% | 11.1% | 29.9% | 98.3% |
| Mar. 2001 – Nov. 2001 | 2.7% | -16.5% | 8.4% | 34.2% |
| Dec. 2007 – Jun. 2009 | 15.9% | 14.4% | 57.7% | 136.9% |
| Average | 12.9% | 15.3% | 40.1% | 78.7% |
As you can see, the average across all of these periods and all of these recessions is in the double digits. Historically speaking, if you didn’t have your money in the markets during the three months leading up to the end of a recession, you missed out on almost 13% worth of gains each time you sat on the sidelines.
Wrapping it Up
The best way to invest through a recession is absent-mindedly. Set up automatic contributions, and then try and just forget about your money for a while. If you do, it might just be one of the best things you do for your investments over the long term.
