Why Investors Shouldn’t Overreact to Talk of a Recession

Stocks typically begin to recover during recessions, in anticipation of economic and corporate earnings growth.

Vanguard continues to project a 35% chance of a recession in Australia over the next 12 months, influenced in part by the potential of other developed economies entering recession. In this context, preliminary data suggesting that the U.S. economy contracted between April and June for a second straight quarter may be causing local investors to pay more attention to increasing recession speculation

Investors wondering if we’re headed for 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.

_{Source: Vanguard calculations, as of December 31, 2021, using Refinitiv.}

The chart shows the one-year annualised return of the US 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.

• 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 Australia, 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.

Advice can help

Investors who want help setting investment goals or balancing potential rewards and risks in their portfolios may want to consider seeking professional financial advice. In addition to the important function of building an appropriate portfolio, advice can play a valuable role providing counsel when emotions run high and preventing short-term stress from getting in the way of reaching long-term goals.

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Everyone’s goals and financial situations are unique which is why everyone’s financial strategies should be unique too. That’s why it’s worth navigating your finances with a financial planner. 

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Disclaimer: The information (including taxation) in this website does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.

The above material has been reprinted with the permission of Vanguard Investments Australia Ltd.