Are recessions a good time to invest?

When it comes to past recessions, the Mark Twain quote, ‘History never repeats, but it often rhymes’ certainly applies. No two recessions have ever been the same, but they often have similar characteristics.

Recessions are defined technically as two continuous quarters of negative GDP growth, but they are also known as a significant and widespread downturn in economic activity that lasts for a sustained period.

Many economies have recessions every seven to ten years, but in Australia we have had slightly fewer due to our resources sector and proximity to China. Our most recent technical recession was after the covid crash in 2020.

As per the below chart from Darrow Investment Management, in the US they have had 11 recessions since 1948, and the chart shows how the S&P 500 fared through each of these recessions.

Please note that the returns on the chart are cumulative (actual) returns, and not annualised returns.

The chart shows some interesting patterns. In the 12 months before a recession occurs, the S&P 500 on average fell 3%. During a recession, the results were mixed, with the market having ups and downs, but on average dropping 1%. However, after a recession, the market almost always makes good gains, with the market rising on average 20% after two years.

Though these results are probably what you’d expect, it’s still interesting to see it visualised, as it shows what may happen when we move out of the current downturn.

Navigating Recessions

For an investor living through a recession, there’s always plenty that’s not clear, including its length and depth. There are also unknowns about whether further unexpected events could see the market move even lower.

What we do know is that recessions are often great opportunities for investors. With stock prices depressed, buying can improve the chances of gains when the markets correct.

In 2018, Buffett said, ‘The best chance to deploy capital is when things are down’.

The Pendulum

Famed investor Howard Marks often speaks about the market pendulum, and how it swings from the positive to the negative, then back to the positive.

The important thing is to be in the market when the pendulum does eventually swing back. Taking a ‘wait and see’ approach, can result in you missing the first five or so percentage points of the rebound.

One of the key takeaways from the chart, is that if you want to pick up the good returns seen after a recession, you must be in the market.

The InvestSMART Investment Committee does not try to predict upcoming economic events. Instead it focuses on creating diversified portfolios in line with the stated risk profile and recommended timeframe. Talk with the team today via the chat function in the bottom right-hand corner about our investment approach.