Don't Let a Recession Faze You

Apr 14, 2020 | Warren Andrukow


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There is a lot of talk in the media lately about the likelihood of a recession. While a recession may occur, it doesn’t guarantee that financial markets will perform poorly. As shown in the below article, nearly three-quarters of the 15 U.S. recessions since 1926 have resulted in positive returns close to 8% per year for the two years following the start of the recession. A two-year cumulative return of over 16% would be welcomed by most investors following the beginning of a recession.

Long-Term Investors, Don’t Let a Recession Faze You

With activity in many industries sharply curtailed in an effort to reduce the chances of spreading the coronavirus, some economists say a recession is inevitable, if one hasn’t already begun.1 From a markets perspective, we have already experienced a drop in stocks, as prices have likely incorporated the growing chance of recession. Investors may be tempted to abandon equities and go to cash because of perceptions of recessions and their impact. But across the two years that follow 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 shows that in 11 of the 15 instances, or 73% of the time, returns on stocks were positive two years after a recession began. The annualized market return for the two years following a recession’s start averaged 7.8%.

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.

EXHIBIT 1

Downturns, Then Upturns

Growth of wealth for the Fama/French Total US Market Research Index

Downturns, Then Upturns

Past performance, including hypothetical performance, is not a guarantee of future results.

 

GLOSSARY

Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American Depositary Receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

 

FOOTNOTES

1Nelson D. Schwartz, “Coronavirus Recession Looms, Its Course ‘Unrecognizable,’” New York Times, March 21, 2020; Peter Coy, “The U.S. May Already Be in a Recession,” Bloomberg Businessweek, March 6, 2020.

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