Most economists don't expect the U.S. economy will enter a recession in 2026. J.P. Morgan (JPM 2.28%) Global Research projects the likelihood of a recession this year at only 35%. The Federal Reserve Bank of New York's probability of a recession by November 2026 based on Treasury spreads is even lower.
They could be wrong, though. Should you buy stocks if a recession is indeed coming this year? Here's what history shows.
Image source: Getty Images.
A clear pattern
The S&P 500 (^GSPC 0.34%) was established in its current form with 500 companies in March 1957. Since then, the U.S. has experienced 10 recessions. How did the index perform during the years a recession began?
It took only five months for the first recession to occur following the creation of the S&P 500. The Federal Reserve had increased interest rates to combat rising inflation. A recession began in August 1957 that lasted for eight months. The S&P 500 ended down 11% in its inaugural year.
Two mild recessions came over the next 12 years, one beginning in 1960 and another in 1969. The S&P 500 fell by 2% in 1960 and by nearly 11% in 1969.
The Arab oil embargo that began in 1973 led to a more severe U.S. recession. Unsurprisingly, the impact on the stock market was significant, with the S&P 500 plunging 19%.
A "double-dip" recession hit the U.S. economy beginning in 1980. While the first part of this recession lasted only six months, the economy went into recession again in July 1981. The S&P 500 declined during the recessionary period in 1980, but rebounded to end the year up by almost 24%. However, the index fell nearly 8% the following year with the second part of the double-dip recession.
Other U.S. recessions began in 1990 and 2001, with the S&P 500 declining both years. The most recent two recessions were anomalies, though. The Great Recession began in December 2007. Although the S&P 500 gained over 4% that year, it began to tumble in the final few months and plunged nearly 41% in 2008. The S&P 500 also sold off sharply during the COVID-19 recession of 2020. However, the recession and the downturn were short-lived. The S&P ended 2020 up by roughly 16%.
The clear pattern from these 10 recessions is that the S&P 500 almost always performs dismally during an economic downturn. The only cases where the index delivered positive gains during a year a recession began were when the recession either lasted for only a few months at the beginning of a year or began at the end of a year.
An even clearer pattern
There is a clear pattern for the S&P 500's performance during years that recessions started. However, I think an even clearer pattern emerges when we expand our time horizon. Check out the table below:
|
U.S. Recession Start |
S&P Gain/Loss 5 Years Later |
S&P 500 Gain/Loss 10 Years Later |
|---|---|---|
|
August 1957 |
+24% |
+103% |
|
April 1960 |
+56% |
+59% |
|
December 1969 |
-21% |
+14% |
|
November 1973 |
-1% |
+64% |
|
January 1980 |
+53% |
+223% |
|
July 1981 |
+90% |
+193% |
|
July 1990 |
+50% |
+306% |
|
March 2001 |
-17% |
-25% |
|
December 2007 |
-5% |
+77% |
|
February 2020 |
+309% |
To be determined |
Data source: YCharts. Table created by author.
In most cases, the S&P 500 was up by a solid percentage within 5 years following the start of a recession. The index also delivered strong returns over the next 10 years in each case except the recession in 2001 that occurred after the dot-com bubble burst. This period included the financial crisis of 2007 through 2009, which was one of the worst economic challenges in U.S. history.
Overall, the average gain for the S&P 500 five years after the beginning of a recession has been almost 54%. The average gain 10 years later of almost 113% is even more impressive.
An easy answer
Let's return to our initial question: Should you buy stocks if a recession is coming in 2026? If history is an guide, the answer is easy – at least if you're a long-term investor. Buying stocks typically pays off over the next five-to-10 years and often does so handsomely.
Maybe the U.S. economy will enter a recession in 2026; maybe it won't. However, whether you invest in an index fund that tracks the S&P 500 or build your own diversified portfolio of stocks, you'll probably be in good shape over the long run regardless of what happens with the economy this year.
