With all the talk around the possibility of recession, how bad is a recession for stocks?
The short answer is that it doesn’t tend to be that bad. Markets don’t always decline in recessions. The average decline for the S&P 500 during the past nine recessions is 1.5% while the median decline is 3.4%. In fact, the time to buy is right before the recession starts.
Markets tend to peak before the recession. Invesco produced the chart below that shows mostly positive performance by the S&P 500 during the actual window of a recession.
Source: Invesco
Taking into account the full decline from the peak to the end of the recession, the average decline for S&P 500 was -15% according to their analysis. That compares to 24% that the S&P 500 has already declined since the peak at the start of 2022.
If markets are worried about the 1970s style inflation, 1973 decline – a total of 31% – may be the better paradigm. But even then, we are already three quarters of the way there.
The more important message is that stocks have performed above average in the three months before the end of a recession, as well as the subsequent 1-, 3-, and 5-year periods.
In summary: let other investors worry about the recession.