What Can We Learn from Past Market Recessions?

January 26, 2024

Investors facing the specter of an impending recession may be inclined to flee equities, fearing market downturns. However, empirical evidence suggests that stock prices often factor in recessionary expectations beforehand, experiencing declines before the official onset of a recession. Analyzing 16 recessions in the US over the last century, it was found that in 12 instances, stock returns were positive two years after the recession began. The average annualized return during this period was a robust 8.8%. To put it into perspective, a $10,000 investment at the peak of the business cycle would have grown to an average of $12,145 after two years. This historical pattern of positive post-recession performance offers reassurance to investors grappling with concerns about holding onto stocks amid heightened recessionary risks. For more comprehensive financial insights, visit our YouTube Channel

Full transcript:

Hello, welcome to Arista Advice! Question of the week is: "Paul, what can we learn from past market recessions?" Well, there's a lot that we can learn, but let's look at the facts.

As you'll see on this chart, investors may be tempted to abandon equities when there's a heightened risk of a recession. But research has shown that stock prices incorporate these expectations and have already taken in the current news and statements that are being made by individuals that think they need to say something when they really don't.

In twelve of the last 16 recessions in the US, stock returns were positive two years years after the recession began. The average annualized return two years after the onset of these 16 recessions was 8.8%. A $10,000 investment at the peak of the business cycle would have grown to $12,145 after two years on average. So don't get caught up with the media. Matter of fact, just turn off the media. Delete it. Delete the app, turn it off, but don't get into reading and trying to outguess and outsmart the market. You just can't. Always be a long-term investor in a short-term world.

Remember, go to AristaWealth.com to get other videos, tools, tips, and resources to help you live a life of significance.

Graph source: Dimensional 2023