Here’s How The Stock Market Performs During Economic Recessions

The stock market has had its worst start to a year in recent history as recession fears loom. There have been 13 recessions since World War II and there have been three in the 21st century. Another one could be on the way.

It's no wonder that investors are concerned about the Federal Reserve's ability to bring down inflation as it tightens monetary policy. The S&P 500 fell into a bear market last month as investors were confused between rising rates and inflation.

When inflation is high and the Federal Reserve is working hard to quell it, recessions happen more often than not. There is a 50% chance of a recession within the next two years, according to him.

When the economy is facing a recession, how do stocks do? Since 1945, the S&P 500 has risen an average of 1% during recessions. Market tops before the start of recessions and bottom before the end of recessions.

The worst is over for the stock market before it ends for the economy. The S&P 500 has bottomed out around four months before the end of a recession in almost every instance. Seven months before the beginning of a recession, the index hits a high.

The last four recessions have seen the S&P 500 decline an average of 8.8%. Since World War II, the S&P 500 has posted positive returns in half of the 13 years with a recession.

Sam Stovall, chief investment strategist for CFRA Research, says that the stock market falling into a decline is an indication that most investors think we are headed for a recession. It's a good time to get back into the market when we fall into a recession.

In the midst of a recession, where should you put your money? Consumer and health-care stocks have performed better than airlines, automobile manufacturers, hotels and casino stocks during the recession.

During the last recession in February to April 2020, stocks fell but the S&P 500 ended the year higher. The stock market fell 40% in 2008 before recovering in 2009.

After the U.S. economy contracted by 1.4% in the first quarter of 2022, economists still expect economic growth to remain solid with a rebound in second-quarter GDP of up to 3% Stovall doesn't see a recession in the foreseeable future, but risks are rising.

The Fed is fighting an uphill battle given stock market losses, high inflation, and rising recession risk. He doesn't see a looming recession due to solid GDP and earnings growth, as well as moderate inflation later in the year.

The 1994 soft landing scenario is an ideal one for economists. The economy avoided a recession despite the fact that stocks were negative for the year as the Fed raised rates seven times.

The election in November is adding to the uncertainty. The lowest average S&P 500 return in the second year of a presidential cycle is4.9%. The second and third quarters of the year have the worst returns with more volatility than any other time during the presidential cycle.

In light of the heightened market volatility facing investors this year, we believe this trend is likely to continue in 2022.