Some economic indicators are suggesting that a recession is possible in 2023, while others are sending mixed signals.
It's important to realize that economic fluctuations are normal, and that if we enter a recession, it is not the time to panic. As detailed below, every recession is unique, with varying lengths and severities. Putting recessions in context, in the past, we’ve survived every slowdown, and the U.S. economy’s trajectory over time has been positive.
The typical business cycle comprises four phases: expansion; peak; contraction; and trough. As unpleasant as they can be––especially for those who lose their jobs or businesses––recessions are not an uncommon part of the business cycle. In fact, the U.S. economy has lived through 13 recessions since World War II. These downturns have ranged from long and deep to short and shallow. America's postwar recessions have lasted 10 months on average, while expansions have lasted 57 months.1
In the accompanying illustration below, you can see how stock prices have reacted before, during, and after each of the 13 recessions. Since 1950, stock prices have anticipated recessions, dropped during them, and started to rise before they ended. However, keep in mind that past performance is no guarantee of future returns.2,3,4
More specifically, the illustration shows that stocks dropped an average of 4% during the year before each recession. During the recession itself, stocks fell about 20% before entering a recovery phase and trending higher.2
As financial professionals, we know that trying to time recessions or markets is impossible. Making major portfolio moves in anticipation of a slowdown is difficult even for professional investors. Instead, we monitor the economy and encourage our clients to maintain a focus on their goals, time horizons, and risk tolerance.
If you'd like to talk with us about creating a long-term financial strategy to help you navigate the ups and downs of the business cycle, please don't hesitate to contact us.
1. History.com, 2023
2. CurrentMarketValuation.com, November 4, 2022
3. Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
4. Stocks are represented by the Standard & Poor’s 500 Composite Index, an unmanaged index that is considered representative of the overall U.S. stock market. Individuals cannot invest directly in an index. The S&P 500 was expanded in 1957 to include 500 stocks. Prior, the composite index comprised 233 companies.