Over the past year, Federal Reserve officials have aggressively raised interest rates to squash inflation, but Chairman Jerome Powell has simultaneously expressed confidence in the prospects of a "soft landing" for the U.S. economy. In other words, officials hoped to bring inflation back down to their 2% target without causing a recession. But that no longer seems plausible.
According to minutes from the March meeting of the Federal Open Market Committee, Fed officials now expect a mild recession before the end of the year. That forecast matches recent predictions from other financial experts. For instance, JPMorgan Chase analysts estimate the chance of a U.S. recession at greater than 50% before the end of 2023.
What does that mean for the stock market? Here's what history says.
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History says the S&P 500 could reach new lows in 2023
The stock market tends to be forward-looking in nature. Future events anticipated by investors are often priced into the market before those events actually occur. For example, every bear market dating back to 1948 has started before the onset of a recession, but each of those bear markets has also stopped before the end of the recession, according to Ned Davis Research.
There are two relevant insights contained in that information. First, the National Bureau of Economic Research has yet to classify the current situation as a recession, though many experts expect one this year. To that end, it stands to reason the S&P 500 could reach new lows in the near term, simply because no bear market in the last 75 years has reached a bottom before the beginning of a recession.
But the second insight is even more valuable. Should a recession occur this year, history says the S&P 500 should begin rebounding before the recession is over. Every bear market in the last 75 years has stopped before the end of a recession, meaning market-timing strategies are often a recipe for disaster.
Investors who sit on the sidelines during bear markets waiting for recessionary pressures to recede will likely miss a portion of the stock market's rebound. That can be a very costly mistake.
History says you should stay invested in the stock market
According to Hartford Funds, 42% of the S&P 500 index's strongest days in the last 20 years have taken place during a bear market, while another 34% of its strongest days have taken place during the first two months of a new bull market (i.e., before it was clear the previous bear market had ended). Missing just a few of the strongest days can dramatically reduce long-term returns.
Consider the following: $10,000 invested in the S&P 500 at the beginning of 1993 would have grown into $158,400 by the end of 2022. That represents a 30-year return of nearly 1,500%.
But if the 10 best days are eliminated from the equation, that same $10,000 invested in 1993 would have grown into just $72,500 by 2022. That represents a 30-year return of 626%, which is less than half the return realized by individuals who stayed invested during that period.
In short, investors who try to time the market often pay a high price for that decision, which means they should stay fully invested (and should keep buying good stocks or index funds) during the current bear market, even if the U.S. economy slips into a recession later this year.
