Should I Invest in Stocks During a Recession?

Table of Contents

Recession Summary Table

Wilshire 5000 Total Return Cumulative Historical Trend

US Quarterly GDP vs. 10-Year UST Yield

Dating back to 1980, the U.S. has experienced seven economic recessions, including the current recession we are experiencing. On average, a recession has resulted in equity prices declining by (22%) from the start of the recession to the bottom. Although it is nearly impossible to predict the bottom of the recession, it is important to note that historically the recovery in stock prices has occurred during the recession and has often been significant (avg. recovery of +26%).

Recession Summary Table

Source: Federal Reserve Economic Data (Wilshire 5000 Index), Ahara Advisors.
¹The current 2022 recession is still underway, the (24%) decline is reflective of equity prices October to-date

Wilshire 5000 Total Return Cumulative Historical Trend

View fullsize

Source: Federal Reserve Economic Data (Wilshire 5000 Index), Ahara Advisors

So far during 2022 the equity markets have declined (24%) with investors and management teams debating if and when we may enter a recession, although negative GDP growth in 1H2022 suggests we’ve already entered the technical definition of a recession¹.

The chart below highlights the relationship between the 10-Year US treasury yield against quarterly US GDP growth. During periods of economic expansion the Fed raises rates to cool an overheating economy and fight inflation, while during economic contractions the Fed cuts rates to stimulate economic growth and raise employment.

In the last six recessions, the Fed has cut rates during the recession which can help set-up a favorable equity backdrop as future cash flows are discounted at lower rates. If history were to repeat itself, we can extrapolate that a recovery in stock prices is likely to occur before GDP turns positive as the market prices in future interest rate cuts to stimulate the economy.

US Quarterly GDP vs. 10-Year UST Yield

Source: Bloomberg, Ahara Advisors

These dynamics make timing the market quite tricky. On one hand, stocks tend to fall during a recession, on the other hand, they tend to have strong returns from the middle-to-the-end of the recession. If a speculator gets that timing right, they will do quite well.

For investors, we think the more fruitful path is to understand these dynamics and to adjust capital deployment pace accordingly. At Ahara Advisors, we tend to deploy capital more aggressively during recessions and more conservatively during expansions. More importantly, we always recommend capital deployment schedules that maintain a high level of liquidity and optionality for our clients.

---

¹ The technical definition of a recession is two consecutive quarters of negative GDP growth, which was the case during 1Q22 and 2Q22 reporting negative annualized GDP growth of (1.6%) and (0.6%), respectively. However, Q3 US GDP growth of 2.6% complicates the analysis as the data continues to suggest a recessionary environment (slowed growth, increased unemployment).