During a recession, the stock market is typically volatile, and share prices can experience wild swings. Falling stock prices are one of the potential implications of a recession. In general, stock prices often decline during the early part of a recession, often due to negative sentiment around poor or lackluster corporate earnings. However, the stock market can often recover before the recession is over.
Investors react quickly to any hint of news, either good or bad, and the flight to safety can cause some investors to pull their money out of the stock market entirely. However, its important to note that recessions do not last forever, and during the early stages of a recession when sentiment is especially negative, it might be a good time to buy securities that are on sale.
Its also worth noting that not all sectors perform poorly during a recession. Sectors that produce goods and services that people cannot do without tend to perform better.
Historically, the U.S. stock market has peaked about five months before the start of a recession. Looking at the 31 recessions between 1869 and 2022, the correlation between U.S. stock market returns and GDP changes over the 31 recessions is 0.30. This positive correlation is mostly driven by the 2020 recession, where GDP dropped 17.8% on an annualized basis and the market lost 63.4% on an annualized basis. Excluding this period, the correlation is near zero.
In summary, during a recession, stock prices typically decline, and the markets can be volatile with share prices experiencing wild swings. However, its important to note that recessions do not last forever, and during the early stages of a recession, it might be a good time to buy securities that are on sale.
