How do recessions impact the stock market?

Renowned investor Stanley Druckenmiller recently said he ‘would be stunned’ if the US didn’t end up in a recession in 2023. 

But what is a recession?

While the technical definition of a recession is two consecutive quarters of negative GDP growth, what a recession looks like in real terms and how it can impact the stock market, yields less clear cut answers. 

The state of the US economy

Overall, looking at the broader state of the US and global economy is probably more important than arguing over the ‘technical definition’ of a recession. Here’s a quick read on the state of the US economy right now: 

  • Interest rates are at multi-decade highs, with the US Federal Funds rate sitting at between 3.00% to 3.25%
  • In September inflation again came in ahead of economist expectations, rising to 8.2% 
  • GDP growth has been weak for the last two quarters, coming in at -1.6% in Q1 and then -0.6% in Q2 in 2022  
  • Despite the US unemployment rate standing at just 3.5%, there are still over 10 million job openings in the country – suggesting dislocations in the labor market

Amid this worrying economic data, we’ve seen stocks fall significantly in 2022. Since the start of the year the S&P 500 index has dropped a staggering 22% or 1,100 points – to October 20, 2022. 

Individual names that rode the bull run of the last decade – the likes of Peloton, Meta (Facebook), and Tesla – are down even more than that. So what comes next? 

How recessions impact stocks

Whether you think we are (1) currently in a recession, (2) heading for one, or (3) will be able to avoid one, below we look at how recessions have historically impacted stock market performance, according to research from Darrow Wealth Management. 

Here’s a snapshot: 

Source: Darrow Wealth Management

Let’s start with the bad news. In the lead up to a recession and during one, you can expect stocks to fall 2% and 1% on average, respectively. 

Keep in mind, that’s just an average. During the 2007 GFC-fuelled recession for example, stocks actually fell a staggering 37%. 

Now here’s the good news. After a recession, stocks tend to rise. Not only that, but the further you move away from a recession, the higher average stock returns you’re likely to see, according to that research. 

Check it out. 6-months after a recession, stocks on average gain 7%, 12-months after that figure rises to 16%, and then a full 2-years after a recession stocks have on average returned an impressive 20%. 

How to invest in US stocks, with Syfe

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Want to learn more about the markets? We just published a blockbuster guide on how to invest in US stocks in Australia. Read it here. ( FYI, we may be seeing a lot of volatility right now, but US stocks have outperformed ASX stocks significantly in the last 5-years.) 

This article/webinar is brought to you by Syfe Australia Pty Ltd., CAR number 1295306 of Sanlam Private Wealth Pty Ltd (AFSL 337927). Disclaimer: Investing involves risk including the risk of losing your invested amount. We do not provide personalised advice or recommendations.  Any information we provide is general advice and current at the time  written. Please speak to your Financial or Tax adviser for personal advice. Any reference to an investment’s past or potential performance is not an indication of any specific outcome or profit.