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: prices have likely incorporated the increased chance of recession. Investors may be tempted to abandon equities and hold cash because of fear of recession and its impact. But across the two years that follow a recession’s onset, equities generally have a history of
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 give those investors who wonder whether a coming recession may be time to move out of stocks the needed confidence to stick with an informed strategy and stay with their plan.
- 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 .
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.