Why investors shouldn't overreact to talk of a recession
Preliminary data suggest that the U.S. economy contracted between April and June for a second straight quarter. Investors wondering if we’re in a recession and whether they should adjust their portfolios should consider history: Stocks tend to begin to rebound during recessions, in anticipation of a return to economic and corporate earnings growth.
Stocks start to recover before recessions end
Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
The chart shows the one-year annualized return of the Standard & Poor’s 500 Index from 1973 to 2021, including its performance during the period’s seven recessions, as defined by the National Bureau of Economic Research (NBER) and represented by the gray bars. In all cases, the stock market began to recover even as the economy continued to shrink.
There are several key takeaways from the historical performance of stocks during recessions.
- Stock recoveries may begin soon after recessions commence. Over the last half century, the earliest recessionary recovery in stocks began just two months into the brief economic downturn of 2020. The latest recovery started 16 months into the recession of 2007–2009.
- Recessions have been relatively short compared with most investors’ time horizons. The length of the last seven recessions varied, from just two months in 2020 to 18 months during the 2008 global financial crisis. Of course, recent experiences do not preclude a longer recession.
- Investing defies certainty. We don’t know how long any recession may last or how long equity market recoveries may take. Indeed, official declarations of recessions by NBER are backward-looking. A recession can end before it’s been declared, reflecting the challenge economists face in assessing the level of growth in real time.
Our consistent counsel
Whether the United States or any other country or region is in a recession or not, investors should avoid overreacting to the latest economic news and stick with well-considered, long-term investment plans. There’s no evidence that efforts to time the markets reward investors. Quite the opposite, in fact.
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