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.
An easier way of saying this is “buy low and sell high”. People get skittish about investing during a recession, but it’s probably one of the best times to invest because you can stand to pick up stocks for a fraction of th price.
You just need to be careful and diversify because while you can find companies for cheap, there’s a great chance of them going bust as well.