Recessions can be a difficult time for investors, as stock prices tend to take a hit. Markets can be volatile and stock prices can fluctuate sharply in response to news, both good and bad. When a recession is looming, investors may be tempted to take their money out of the stock market entirely. But how much of an impact does a recession have on stock prices? This is an important question for investors to consider as the Federal Reserve works to raise interest rates in an effort to combat inflation. Analysts often point to the recent decline in stocks as evidence that a recession has already been “discounted”, but what does that mean? Oxford Economics conducted research on historical data and found that the S&P 500 index, which fell by approximately 24% from its peak to its mid-June low, is in line with the average decline seen during mild US recessions over the past 15 years.
Severe recessions, such as those of 1973 and 2001, produced an average decline of about 43%.Healthcare has traditionally been the best-performing sector during recessions, but some analysts believe that cyclical sectors such as energy may perform better this time around. Professional traders have adopted one of their flagship trading strategies, according to a frequent market guru. Despite falling prices, bonds remain a key part of many portfolios. If stocks plummet as they enter a recession, interest rates could also fall, allowing bond prices to recover and potentially offset losses. A sharp decline in the stock market is often an indicator of an impending recession, but it is not always the case.
Dividends are especially important during recessions because they provide a cushion even if the stock price falls. The Federal Reserve is fighting an uphill battle when it comes to raising interest rates and combating inflation. Some stocks may already be trading for a severe recession and could hit bottom before the rest. Investing in funds rather than individual stocks can help reduce company-specific risk. Stocks with high and reliable payouts, such as Merck and AbbVie, offer good competition for bonds that many investors flee to in difficult times. The S&P 500 index has fallen by 1000 points, or about a fifth, from January to June, leading many analysts to believe that a recession is coming soon.
The second year of a presidential cycle often tends to have weaker stock yields overall, producing the lowest average return of the S&P 500 at only 4.9%. The unemployment rate was set at 3.75% in August, which is still relatively low compared to other times in history. International exposure is also important for investors looking for diversification. The Price fund offers a portfolio full of stocks whose dividends may be growing but are small. The only downside is that it does not offer much protection against company-specific risk. The S&P500 briefly plunged into a bear market last month due to concerns about inflation and rising rates.
Ultimately, investors must weigh their options carefully when considering how best to protect their investments during a recession.