Investors may be tempted to abandon equities and go to cash when there is a heightened risk of recession. But research has shown that stock prices incorporate these expectations and generally fall in value before a recession even begins.
Across the two years that follow a recession’s onset, equities have a history of positive performance. Data covering the past century’s 16 US recessions show that investors tended to be rewarded for sticking with stocks. In 12 of the 16 instances, or 75% of the time, returns on stocks were positive two years after a recession began (see Exhibit 1). The average annualized market return for the two years following a recession’s start was 8.8%. Looked at another way, a $10,000 investment at the peak of the business cycle would have grown to $12,145 after two years on average.
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Exhibit 1: Downturns, Then Upturns
Performance of a hypothetical $10,000 invested when a US recession began
Performance of a hypothetical $10,000 invested when a US recession began
Past performance is no guarantee of future results.
Data presented in the growth of $10,000 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.
Recessions understandably trigger worries over how markets might perform. But a history of positive average performance following a recession can be a comfort for investors wondering whether or not they should move out of stocks.
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