RecessionA few weeks ago I wrote about the historical behavior of the stock market during recessions.  The bottom line is that you shouldn’t alter your investing strategy when the financial press starts bellowing that a recession is near. 

A few days ago I came across a recent article by Larry Swedroe on Seeking Alpha that adds some depth to the analysis. 

According to Swedroe there have been 11 recessions lasting an average of 11 months since World War II.  The CNN tool that I pointed to in my earlier article shows 9 recessions.  The discrepancy may be due to covering slightly different time periods (the CNN tool starts at 1950 and Swedroe starts at the end of WW2) or using different definitions for recession.

During the worst of the 11 recessions, the S&P500 lost 17.9%.  During the best recession (or least worst recession) the S&P500 gained 27.6%!  I’d love more recessions like that.

The average S&P500 return during the 11 recessions was 7.1%.  Let’s see, a return of 7.1% over an average 11 month period - hardly something to be afraid of.

Swedroe rightly points out that you wouldn’t want to exit the market even if you could perfectly time the beginning and end of the recession.  After all, what would you invest in during the recession that would beat 7.1%?  Not treasury bills, which averaged 5.1% over the 11 recessions.

Conclusion

By the time a recession begins, the stock market has already priced in the recession.  You would have to exit the market sufficiently ahead of the recession, before the market has priced it in.  And that, my friend, is impossible.  It is already impossible to determine that a recession has begun at a given point in time, but it is even more impossible to make the determination a few weeks or months in advance of the recession!