How Does The Stock Market Typically Perform During U.S. Recessions? | Russell Investments (2024)

FAQs

How does the stock market perform during a recession? ›

During the recession phase of the business cycle, income and employment decline; stock prices fall as companies struggle to sustain profitability. A sign that the economy has entered the trough phase of the business cycle is when stock prices increase after a significant decline.

During the first half of a recession stage, core bond returns (i.e., Treasuries and investment-grade securities) are historically positive, while returns for high yield bonds, equities, and commodities are negative.

Treasurys, says Collins, are similar to government and corporate bonds, as they are backed by the full faith and credit of the U.S. government. They are typically seen as safe investments during a recession. "In times of market volatility, investors may flock toward Treasury bonds, seeking stability," he says.

Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.

Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009. These drops in stock prices are large relative to those associated with earlier recessions since World War II.

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

Where should you put cash in a recession? Consider putting money you might need tomorrow in a savings or money market account. For longer-term investments, you can put cash in certificates of deposit (CDs) or the stock market.

CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.

If you decide to make some changes to your investment strategy in response to economic concerns, there are ways to reduce your risk. Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate.

Should I leave my money in the stock market during a recession? ›

Some may not recover from a recession for years. Others may not recover at all. If you invest, you may experience gains or losses. If you don't invest, losses will be off the table, but you may miss the early stages of a recovery, or inflation may erode the purchasing power of your cash over time.

Try not to panic about the scary headlines and remember that staying invested is almost always the best response. Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover, and individuals who don't invest in the market at all lose out.

In almost every case, the S&P 500 has bottomed out roughly four months before the end of a recession. The index typically hits a high seven months before the start of a recession. During the last four recessions since 1990, the S&P 500 declined an average of 8.8%, according to data from CFRA Research.

Invest in Dividend Stocks

The best dividend stocks provide a cushion for your portfolio during recessions. Even if a company's stock price falls, it may keep paying dividends. “Dividends can indicate strength and offer a method to dollar cost average during market volatility,” Griffith says.

The S&P 500 has slumped an average of 4% in the six months following the first reduction of a rate-cutting cycle, if the economy was in a recession, data from Evercore ISI going back to 1970 showed. That compares to a 14% gain for the S&P 500 when the Fed cut in a non-recessionary period. The index is up 18% in 2024.