When investors are confronted with the word “recession” immediately alarm bells start ringing. Some hold back on new investments and some take their money out of the market altogether. Many times, I have warned that trying to time the market is the worst strategy of them all. Both approaches, holding back and, even worse, getting out of the market completely are wrong. Instead, the right strategy would be to take a contrarian approach. But why? It is very simple. The stock market is not the economy. The stock market looks ahead, while the economy looks back. That’s why now is not only a good time to buy stocks but the ideal time.
There have been 11 recessions since 1953. The average recession lasted about 12 months. Throughout all of those periods, stocks lost an average of just 1%! Nearly half the economic slowdowns actually saw share prices rise.
In 1953 stocks surged 18% during the recession. In 1960, they went up 17% and in 1980/81 stocks rose 13% during the recessions in 1980 and 1981. It turns out that in fact a recession’s worst returns come the year before it starts, with almost all 11 downturns over the last seven decades showing a decline even while the economy was still growing.
The 12-month period before the official start of a recession, right about now, in our case, is the worst period. It has seen stocks drop by an average of 3%. And during the six months just prior to a recession, stocks have gone down an average of 2%. Over the last 180 days, stocks are down 2.5%. If history repeats then stocks should rise from here any time now.
During the 6 months after the end of a recession, stocks return an average of 7%. 12 months after the end of a downturn, they jump by 16%. And 2 years after the end of a recession, they’re up by an average of 20%. An investor who invested money into stocks at the start of a downturn saw a positive return within 12 months in 91% of the time. Few other periods offer such strong odds of success.
Remember, stocks do not reflect the economy. Have no fear and take advantage of it. Now is probably the best time to buy.
Sven Franssen