Economics and markets

Why investors shouldn’t overreact to talk of a recession

August 30, 2022

Preliminary data suggest that the U.S. economy contracted between April and June for a second straight quarter. Investors wondering if we’re in a recession and whether they should adjust their portfolios should consider history: Stocks tend to begin to rebound during recessions, in anticipation of a return to economic and corporate earnings growth.

Stocks start to recover before recessions end
Line chart shows the performance of the S&P 500 Index from 1973 through 2021, including its performance during seven recessions. During the recession that began in November 1973 and ended in February 1975, the S&P 500 Index reached its low toward the end of this period, in September 1974. The next recession lasted six months, from January through June 1980.The S&P reached its low in March, slightly earlier than in the previous recession. The recession that began in July 1981 lasted until October 1982. The low point of the S&P 500 Index occurred relatively late in the period, in July 1982. During the recession that began in July 1990 and extended through February 1991, the S&P 500 Index hit its low in the middle of the period, in October 1990. For the recession that occurred from March through October 2001, the low occurred late in the period, in September. The next recession started in December 2007 and lasted through May 2009. The low for the S&P 500 Index occurred near the end of the period, in February 2009. During the 2020 recession, which lasted only two months, the low occurred during the latter half of the period, in March.

Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

The chart shows the one-year annualized return of the Standard & Poor’s 500 Index from 1973 to 2021, including its performance during the period’s seven recessions, as defined by the National Bureau of Economic Research (NBER) and represented by the gray bars. In all cases, the stock market began to recover even as the economy continued to shrink.

There are several key takeaways from the historical performance of stocks during recessions.

  • Stock recoveries may begin soon after recessions commence. Over the last half century, the earliest recessionary recovery in stocks began just two months into the brief economic downturn of 2020. The latest recovery started 16 months into the recession of 2007–2009.
  • Recessions have been relatively short compared with most investors’ time horizons. The length of the last seven recessions varied, from just two months in 2020 to 18 months during the 2008 global financial crisis. Of course, recent experiences do not preclude a longer recession.
  • Investing defies certainty. We don’t know how long any recession may last or how long equity market recoveries may take. Indeed, official declarations of recessions by NBER are backward-looking. A recession can end before it’s been declared, reflecting the challenge economists face in assessing the level of growth in real time. 
Our consistent counsel

Whether the United States or any other country or region is in a recession or not, investors should avoid overreacting to the latest economic news and stick with well-considered, long-term investment plans. There’s no evidence that efforts to time the markets reward investors. Quite the opposite, in fact. 

Vanguard can help

Investors who want help setting investment goals or balancing potential rewards and risks in their portfolios may want to explore our advice offerings. Our unique, investor-owned structure keeps us focused on your needs first.1

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1 Vanguard is investor-owned, meaning the fund shareholders own the funds, which in turn own Vanguard.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

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