According to preliminary estimates, the U.S. economy fell for the second consecutive quarter between April and June. Investors debating whether or not to modify their portfolios based on whether or not we are in a recession should examine the past. During recessions, stocks typically begin to recover in expectation of a return to economic and corporate earnings growth.
The past is not indicative of future returns. Since it is not possible to invest directly in an index, the performance of an index is not a precise reflection of any individual investment.
Several important lessons may be drawn from the historical performance of stocks during recessions.
Soon after recessions begin, stock market recoveries may begin. In the last fifty years, the earliest stock market rebound from a recession began just two months into the brief economic downturn of 2020. The most recent rebound began 16 months into the 2007–2009 recession.
Recessions have been quite brief relative to the time horizons of the majority of investors. The duration of the last seven recessions ranged from two months in 2020 to 18 months during the global financial crisis of 2008. Of fact, recent experiences do not preclude a lengthier recession.
Investing lacks predictability
We do not know the duration of recessions or the length of the equities market recovery. Indeed, official NBER declarations of recessions are retrospective. A recession might conclude before its official declaration, illustrating the difficulty economists confront in estimating growth in real time.
Our constant advice
Whether or not the United States or any other country or region is in a recession, investors should avoid responding to the most recent economic news and adhere to well-considered, long-term investing strategies. There is no proof that market timing is profitable for investors. In fact, the opposite is true.
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