Stock prices usually plunge during a recession. The stock market may be extremely volatile, with share prices swinging dramatically. Investors respond rapidly to any hint of good or negative news, and the flight to safety can force some investors to withdraw their funds entirely from the stock market.
Do stocks rise during a downturn?
The graphic above (which only includes recessions from the 1950s as given by NBER) has many major takeaways:
- Length. Since 1953, the average length of a recession has been 10.3 months. The Covid recession lasted barely two months, while the Great Financial Crisis of 2008 lasted nearly twice as long.
- Prior to and during economic downturns. The S&P 500’s cumulative price return was lowest in the year leading up to a recession (-3%), followed by six months before (-2%), compared to an average loss of 1% during a recession. Furthermore, approximately half of the time, returns were positive across all three periods. Markets look ahead, whereas economic data looks back.
- After a downturn. It should come as no surprise that as time passes following a recession, cumulative returns become increasingly positive. Stocks, after all, tend to go up rather than down. And the longer you invest, the less likely it is that you will lose money. Positive returns approximately double in frequency.
- Every time is unique. History is a valuable resource, but it cannot be used to foretell the future. The 1980 recession ended a year before the beginning of the 1981 recession. The ramifications can be seen in the graphs above. Similarly, the Great Recession of 2008-2009 was by far the worst for stocks during a downturn, and the outperformance one year after the Covid fall was an exception as well. Despite the year-to-date decline, the S&P 500 has gained more than 59 percent since the conclusion of the 2020 recession in May 2020 (almost 64 percent if dividends are included!). 1
In a recession, does the stock market fall?
How can you figure out if a recession is already factored into the S&P 500? Or how much would stock prices fall if there was one? It’s based on earnings from the S&P 500.
According to Colas, the S&P 500’s earnings have declined by an average of 30% in the five profit recessions since 1989. Recessions were responsible for four of the reductions. What does this mean for the S&P 500 today? The index’s companies just reported a $55-per-share profit in the fourth quarter. According to Colas, this equates to $220 in “peak” earnings power per year.
That indicates that if the economy tanks, the S&P 500’s profit will certainly plummet by 30% to $154 per share. The S&P 500 earned exactly that in 2019, when it traded for 3,000 by mid-year. This offers you a market multiple of 19.5 times, which is reasonable. In a recession, if investors are only willing to pay around 20 times earnings, the S&P 500 drops to 3,080, or a 28 percent drop, according to Colas.
“We’re not predicting a decline in the S&P to 3,080. The objective here is to highlight that, despite recent turbulence, large-cap stocks in the United States still predict 2022 to be a good year “he stated
In a downturn, how do you make money?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
How long do most recessions last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.
Are stocks in the alcohol industry recession-proof?
- Assets, companies, industries, and other organizations that are recession-proof do not lose value during a downturn.
- Gold, US Treasury bonds, and cash are examples of recession-proof assets, whereas alcohol and utilities are examples of recession-proof industries.
- The phrase is relative since even the most recession-proof assets or enterprises might suffer losses in the event of a prolonged downturn.
During a recession, what increases?
- A recession is defined as two consecutive quarters of negative economic growth, however there are investment strategies that can help safeguard and benefit during downturns.
- Investors prefer to liquidate riskier holdings and migrate into safer securities, such as government debt, during recessions.
- Because high-quality companies with long histories tend to weather recessions better, equity investment entails owning them.
- Fixed income products, consumer staples, and low-risk assets are all key diversifiers.