If a Recession Comes, That is Not a Reason to Sell

The Stock Market and the Economy are Different Animals
Risk Premium Rate of Return vs. Annual Real GDP Growth

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In USD, Annual GDP growth rates obtained from US Bureau of Economic Analysis. GDP growth numbers are adjusted to 2012 USD terms to remove effects of inflation. Data provided by Fama/French. Results shown during periods prior to each index’s index inception date do not represent actual returns of respective index. Other periods selected my have different results, including losses. Back-tested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over relevant time period.

Markets Look Forward, but Recessions Look Back

Are we headed into a recession? A century of economic cycles teaches us we may well be in one before economists make that call, but one of the best predictors of the economy is the stock market itself. Markets tend to fall in advance of recessions and start climbing earlier than the economy does. As the chart above shows, returns have often been positive while in a recession.

All the dots in the upper left quadrant in the chart are years where the US economy contracted but US stocks still outperformed less-risky Treasury bills. It’s a great illustration of the forward-looking nature of markets. If you’re worried, other investors are too, and that uncertainty is reflected in stock prices.

What Are the Long-Term Results?

Whether accompanied by recessions or not, market downturns can be unsettling. But over the past century, US stocks have averaged positive returns over the long-term. A year after the S&P 500 crossed into bear market territory, it rebounded by about 20% on average. After five years, it averaged over 70%.

We believe that staying invested puts you in the best position to capture the recovery. If you take risk out of your portfolio, it should be a strategic, not tactical, choice. We believe the only good reason to sell out of a stock portfolio now—so long as it’s diversified and low-cost—is because you learned something about your risk tolerance or your investment goals have changed.