Today I read a Rich Greifner article at Motley Fool titled “Are We Headed for a Recession? Who Cares?“ Like many articles at Motley Fool these days, it’s mostly intended as a sales tool for its newsletter. But there is some good information nonetheless.
It makes many of the same points I made in “Are We in a Recession? Does It Matter?“ The main idea is that you shouldn’t base investing decisions on whether we’re in an official recession:
“By the time it’s determined that the country is in a recession, odds are that the economy is already close to recovering. For example, the last trough in economic activity occurred in November 2001 — but the NBER didn’t make that determination until July 2003. By that time, the economy had been improving for over a year and a half!”
The stock market is a forward-looking indicator, while recessions are backward-looking.
Mr. Greifner needs only two sentences to sum up the main point of my post “Historical Behavior of the Stock Market During Recessions“:
“Wait, stocks can go up in a recession?
Since 1945, there have been 11 recessions lasting an average of 10 months each. But according to a recent article from Hulbert, during these recessions, the stock market actually rose seven times — and the average market return during all 11 recessions was 3%!”
In other words, the stock market does just fine during recessions.
Conclusion
Historically, exiting the stock market during a recession is a bad idea. It’s nice to see the Motley Fool back up my work (or vice versa!).
I’m not so sure I agree. For one thing, it’s nothing to crow about if the market returns 3% and inflation is running 6-7% (as many believe it truly is now, regardless of what the government’s CPI says).
Is the stock market the best of bad options in a recession? Possibly. But there’s an argument to be made for investing differently in a recession.
KMC:
I’m with you, 3% in 10 months is nothing to shout about. If you could reliably time the market you would move to bonds or TIPS and hopefully beat 3% — assuming everyone else wasn’t doing the same thing and pushing bond yields down.
I was suprised it wasn’t a negative return during recessions. We all have the intuitive sense that “recession = bad”. It’s a pleasant surprise that stocks continue to grow, although slowly.
Thanks for your comment.