Q: Most experts are predicting a recession within the next two years. What would that mean for the stock market, and should I get out of the market until after the next recession passes?
It's certainly fair to say that we're overdue for a recession. Historically, recessions typically occur every four to 10 years, and it's now been 10 years since the last recession ended.
However, there are a few important things to know before you decide to wait on the sidelines.
First, a recession doesn't necessarily mean stocks will get crushed. A recession simply means that the U.S. has at least two consecutive quarters of negative GDP growth. In fact, the stock market's average return during recessions dating back to the mid-1950s has been negative 1.5%. There's a downward bias, sure, but I wouldn't necessarily say stocks get "crushed" during recessions. In fact, the market actually posted gains during four of the last eight recessions.
Furthermore, stocks tend to perform very well in the years immediately following recessions. On average, the S&P 500 generates total returns of 15.3% in the year after a recession ends, and 40.1% in the three-year period following the economy's return to growth.
So while every recession is different, the average situation involves mildly poor performance during a recession followed by fantastic performance after. Because it's impossible to predict with accuracy when a recession will occur or how long it will last, trying to time a recession is generally a bad idea. Invest in businesses that should make it through any tough times relatively unscathed, and then hang on for the long haul.
