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We Are in a Recession. What Does that Mean for Your Investments?

May 19, 2020

Most economists agree that the United States is now in a recession. A recession is a period of economic contraction, where businesses see less demand for their products and services, and many lose money. This tends to keep unemployment higher than average, average incomes tend to fall, and government borrowing may increase.

What does a recession mean for your investments? Intuitively, if the economy is not doing well, investments would not do well either. But that is not always the case. Over the 15 US recessions that have occurred in the past century, the majority have seen US stocks generate a positive return within two years.

The graph below tracks a $10,000 investment in the US stock market from the beginning of each of those 15 historic recessions and shows how the value changed over the ensuing two years. The blue lines indicate a positive return over the following two years, while red lines indicate the value is less than $10,000 after two years.

Note that in some cases the $10,000 invested never decreases in value, and in 11 of the 15 instances, or 73% of the time, returns on stocks were positive two years after a recession began. In fact, the annualized market return for the two years following a recession’s start averaged 7.8%.

recession graph

It may be helpful to keep in mind that market prices are forward looking and incorporate information very quickly. Even in dire financial times, a glimmer of good news can send markets on an upward trajectory.

Of course, past performance is not a guarantee of future results, but history may provide some comfort for investors who wonder how their investments in the stock market may fare over the next few years.

 

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Filed Under: Successful Investing

Written by PartnersInWealth

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