Markets behave surprisingly during recessions, often defying expectations like a moody teenager. Roughly half of U.S. recessions since the Civil War actually produced positive returns for investors. While markets typically decline about 30% on average, they act like fortune tellers, predicting future conditions rather than reflecting current troubles. The correlation between GDP and stock performance is nearly zero during downturns. Recovery usually brings strong gains for patient investors who explore these patterns further.
When most people hear the word “recession,” they picture stock markets crashing and investors losing their shirts. While recessions can certainly shake up the markets, the reality is more nuanced than many people expect.
History shows that stock markets have actually posted positive returns in roughly half of all U.S. recessions since the Civil War. That’s 16 out of 31 recessions where investors made money despite the economic turmoil. The average gain during recessions has been 3.68% for the S&P 500, which might surprise those who assume recessions always spell disaster for portfolios.
Of course, markets don’t ignore recessions entirely. They typically peak about eight months before a recession officially begins, then decline around 30% on average. Most of this decline happens quickly, with market bottoms occurring roughly 169 days into a recession and drops averaging about 21% from peak.
Think of it like a roller coaster that drops fast but often climbs back up by the end of the ride.
The 2008 recession stands out as particularly brutal, with markets losing 54% of their value over 546 days. On the flip side, the 2020 recession lasted only 60 days despite its steep initial sell-off. These examples show how varied recession experiences can be.
Here’s something fascinating: there’s almost no correlation between stock market performance and GDP changes during recessions. Markets are like fortune tellers, trying to predict the future rather than simply reflecting current economic conditions. This forward-looking nature explains why markets sometimes rally even when the economy looks grim. Excluding the unique 2020 recession, the correlation between GDP and stock market returns is near zero.
For investors, the key lesson is staying calm and sticking to the plan. Diversified portfolios help weather the storms, and emotional decisions during volatile times often backfire. Market timing based on recession fears rarely improves long-term results. Recovery from market lows averages nearly +40% in the 18 months following recession bottoms.
Even after the worst crashes, like the 79% drop in 1929, markets have historically recovered. Patience and discipline typically reward investors better than panic selling. Smart investors often use market downturns to identify opportunities for buying quality assets at discounted prices.
While recessions create uncertainty and volatility, they’re not automatically the portfolio killers many people fear them to be.
Frequently Asked Questions
How Long Do Recessions Typically Last and When Do Markets Recover?
Recessions typically last between 6 to 18 months, with the average being around 11 months since World War II.
Think of them like bad weather storms – they feel intense but usually pass fairly quickly.
Stock markets often start recovering before the recession officially ends, sometimes bouncing back 3-6 months early.
Markets are like enthusiastic students who start celebrating before the final bell rings.
Should I Sell My Stocks Before a Recession Hits?
Selling stocks before a recession typically backfires for most investors.
History shows that timing the market is incredibly difficult, and people often end up selling near the bottom and missing the recovery.
Markets usually rebound before recessions officially end, sometimes gaining considerably even during downturns.
Staying invested with a diversified portfolio generally produces better long-term results than trying to predict and avoid market drops.
Which Sectors Perform Best During Economic Downturns?
During economic downturns, certain sectors act like sturdy umbrellas in a storm.
Healthcare, consumer staples, and utilities typically perform best because people still need medicine, food, and electricity regardless of tough times. These essential services maintain steady demand when other industries struggle.
Discount retailers also shine as budget-conscious shoppers hunt for bargains, helping companies like Walmart capture market share from pricier competitors.
How Do Interest Rates Change During Recessions?
During recessions, the Federal Reserve typically cuts interest rates dramatically to help the economy recover.
For example, during the 2020 COVID-19 recession, rates dropped from around 1.75% to nearly zero in just one month. These cuts make borrowing cheaper for businesses and consumers, encouraging spending.
However, savers see lower returns on certificates of deposit and savings accounts, sometimes earning less than 1%.
What Are the Warning Signs That a Recession Is Approaching?
Warning signs of an approaching recession include an inverted yield curve, where short-term interest rates exceed long-term rates.
Rising unemployment, declining consumer spending, and widening credit spreads also signal trouble ahead.
Other red flags include falling industrial production, tightening credit markets, and increased business layoffs.
Even food banks reporting higher demand can indicate economic stress before official statistics catch up with reality.
