A week ago I discussed the large amount of news coverage about whether we’re in a recession. I concluded that a recession should probably not change your investment strategy.
There is a neat interactive tool called “50 years of market swings” at the CNN Money website that supports my conclusion. The tool is essentially a graph showing the relationship between recessions and bear markets over the last 50+ years. Nearly every recession over the last 40 years was preceded by a bear market and was not followed by a bear market.
If you’d like, open up the tool and follow along as you read through the exciting history of recessions in our country.
Three Recessions During 1954-1962
The first three recessions on the chart occurred in the 1954-1962 timeframe during the Dwight D. Eisenhower years. There was no bear market before, during, or after the first recession.
There was a bear market directly before the second recession. The bear market ended early in the recession.
There was no bear market before or during the third recession, but there was a bear market about one year after the recession.
Conclusion: The stock market was not correlated with the recessions. You would not have been able to predict the right time to exit the market based on the timing of the recessions. Getting out of the market during the recessions would have been counterproductive. The market continued to see gains during the recessions.
Two Recessions During 1969-1975
There were two recessions during the Lyndon B. Johnson and Richard M. Nixon years. The second began late in the Nixon administration and carried over into the Gerald R. Ford administration.
In both cases a bear market preceded the recession by a year. In both cases the bear market ended half way through the recession.
To avoid the bear market you would have needed to pull your money out a year before the recession started.
Recall that it takes economists several months to determine that a recession has begun. By the time economists knew these recessions had started, the stock market had already dropped as far as it was going to drop. If you pulled your money out at that point, you would have sold near the bottom of the market.
A better strategy would have been to buy during the second half of the recessions. The midpoint of the recessions seemed to signal the end of the bear market and the beginning of an upward turn.
Three Recessions During 1980-1992
There were two recessions during the late Jimmy Carter and early Ronald Reagan years. There was a recession late in George H.W. Bush’s presidency. Many believe the latter recession was responsible for Bush’s loss to Clinton in the 1992 election.
All three recessions during this time period were like the recessions of the 1969-1975 years. In each case the market had dropped to its lowest point by the time the recession was half over. By the time economists would have confirmed that the recession had begun, the stock market would already be near its low point. Pulling your money out at that point would have been a bad idea.
Recession During 2002
The final recession on the graph occurred during the first term of George W. Bush. This recession is unique. It was accompanied by one of the worst bear markets in the history of the country. The bear market began a year before the recession began, and continued for a year after the recession was over. The recession itself was rather quick compared to the length of the bear market.
Suppose you held on to your portfolio during the first year of the bear market and began to sell when the economists determined the recession had begun. You likely would have sold at a point slightly above the market’s low point, but not by much.
Starting with the 1970′s the recessions have usually signaled the end of bear markets. If you had sold at the time economists declared that a recession had begun, you would have sold at the lowest point in the market.
What Investors Should Do
Assuming that recessions and their accompanying bear markets continue to follow the same pattern that has been established over the last 40 years, selling at the onset of a recession is not a good idea. On the contrary, buying during the last half of a recession seems to be a winning strategy.
Unfortunately there is no way to know when a recession has hit its halfway point. The safest and surest strategy is to avoid drastic changes to your approach and continue to implement a long-term buy and hold strategy. This strategy will succeed even if we are in the middle of a recession.