The economy is very interesting right now. We’re in a period of strong economic recovery coming out of the pandemic. The unemployment rate is only 3.6% and employee wages continue to rise. Consumers are spending a lot. Yet, these factors and others such as supply shortages have caused significant inflation. We’re seeing inflation rates at the highest they’ve been in 40 years.
With many healthy economic indicators, it’s strange to say that we are likely headed for a recession. However, inflation is a genuine concern. There is likely no way to bring it down to normal levels without some sort of recession occurring.
Most of the biggest economic crashes have happened in history as a result of recessions. Though most big businesses are relatively healthy, the S&P500 has been dropping at furious rates after all-time highs not too long ago. The big question is if we can study past recessions to understand how the stock market will react.
The truth is that the economy and stock market don’t always work hand-in-hand. A healthy economy doesn’t imply rising stocks and vice versa. Some trends are unpredictable. There have been some recessions where the stock market actually rose significantly during the same period of economic struggle. Yet, there are others where the stock market has experienced losses in conjunction with a recession.
Where we really need to look are the years that follow a major recession period. This is where history gives us an important lesson that every cloud has a silver lining. Here are the average S&P500 gains in the years after a recession:
We can look back at our most recent recession following the mortgage crisis between 2007-2009. In the six months prior to this, the stock market saw a slight decline of -2.33%. During the recession, it dropped severely by -35.46%. This is by far the worst stock market performance of any recession period to date. However, the first year out of this recession saw S&P 500 gains on average of 14.43%. Within three years, it rose by 57.7%. Within 10 years, the gains were 294.17%.
Timing a recession is not easy as an investor. You may not make every move perfectly leading up to and during these periods of economic strife. However, the good news is there may be great opportunities coming out of a recession. If history shows us anything, it’s that market gains are usually strong. Your investment plan should have enough diversity to get you through the tough times and then enable you to make great moves in the years to follow.
The stock market is a roller coaster that is often unpredictable. So is our economy, in general. They don’t always affect one another like you think they will, but savvy investors know how to make the most of any market conditions. There is a good chance that a recession is around the corner as we deal with such high inflation rates. How well are you prepared?
For all your financial advisement and investment strategy needs, turn to Illumination Wealth. Contact us today to schedule a no-obligation introductory consultation with one of our top advisors.