When the word recession is thrown out by financial commentators, news anchors and famous people tweeting about it (Cardi B) “When y’all think they going to announce that we going into a recession.” People naturally get scared. The recent history of recessions has been brutal. The most recent recession taking place in Spring of 2020 caused by Covid 19 lock downs.
Should I Sell My Stocks During a Recession?
Prior to the Covid recession there was the 2007-2009 recession, which was the worst economic timeframe since the Great Depression that affected the country through the 1930s. Both 2007-2009 and 2020 were extreme recessions. No two recessions are exactly the same. That being said, the last two recessions have given regular people more of a jolt compared to a normal recession, potentially making people more fearful. In mid June, stock market fear was at an “Extreme Fear” level as recorded by the Fear & Greed index shown below:
The Fear & Greed Index
Recessions are not great times when it comes to stock market returns. The median drop for stocks during a recession, from top to bottom, is 24%. It’s not good to lose a quarter of the value of anything, let alone your retirement or life savings. So, where is the Fear & Greed Index right now?
1 Year of the Fear & Greed Index
As of June 17, 2022, stocks hit a near term bottom of being down 24% from the beginning of the year, when they were at their all-time highs. Stocks can potentially go lower even after rebounding from those Mid June lows. However, I would suggest that most of the drop is in and for long term investors this has become a great buying opportunity. Check out the chart below to see stock market drops in previous recessions going back to WWII.
A recession is always a backward-looking economic figure. No one knows for sure that we’re in a recession until at least 6 months after it has already started. A recession is measured by GDP (Gross Domestic Product) falling in two consecutive quarters. Unfortunately for investors, stocks are a leading indicator of where the economy is going. This is why selling when it is announced we are in a recession is like shutting the door after the cat ran out of the house. It doesn’t help!
Investing During a Recession
Investing goes against human nature because we naturally want to stop the pain if something hurts. With investing, that would mean you sell a stock after it’s dropped to a painful point where you can’t take it anymore. Generally, that’s the point in time when, as an intelligent investor you want to be buying stocks not selling them.
If clothes were 24% off, you wouldn’t wait for them to go back up in price when things felt “safe” to buy them at full price. You’d buy them at the discount. In addition, you might even buy 2x what you needed. Stocks should be looked at just the same as an article of clothing when it comes to being discounted. The more stocks drop the higher future returns you can expect to make on new money invested.