Michael E. Schroer, CFA MANAGING PARTNER & CHIEF INVESTMENT OFFICER | RENAISSANCE INVESTMENT MANAGEMENT Highlights The market consensus appears to indicate expectations of a recession to start later this year. What does this mean for stock market investors? Is it possible to time the market and preserve capital by predicting the onset of and recovery from a recession? The table below shows the 12 recessions that occurred in the post-World War II era. The first column shows the price changes of the S&P 500® Index during the recession with, perhaps, a surprising conclusion. The stock market actually rose in 50% of the recessions, with an average loss over all periods of only 0.2% (the clear outlier was the Global Financial Crisis of 2008-2009, which we will discuss shortly). Even with perfect foresight of the start and end of a recession, selling stocks at the beginning of a recession and buying them back at the end resulted in the preservation of capital only 50% of the time. S&P 500 Price Changes During Post-World War II Recessions Data from 9/2/1945–4/30/2023 Source: FactSet What if you perfectly anticipated the start of a recession three months before it began, and then bought stocks back when the recession ended? Column 2 in the table shows the S&P 500 price performance over those periods and, again, 50% of the time the market rose over the period. However, the average and median gains over the periods suggest that there would have been at least some potential benefit from having such foresight. But what if you were late in identifying the end of a recession? Column 3 in the table shows the result of anticipating the start of a recession by three months but then identifying the end of a recession three months after it actually ended. Column 3 shows the market rising two-thirds of the time in these periods, with an average gain over all periods in the mid-single digits. Finally, what if you identify the start of a recession but are three months late in identifying its end? Column 4 shows the market rising 75% of the time in these periods, with an average gain over all periods, again, in the mid-single digits. The object of this exercise is to demonstrate that it is extremely difficult to use predictions about recessions (even if they are accurate) in order to time the stock market. To be sure, if an investor had been able to predict the 2008–2009 recession with even partial accuracy, they would have reaped significant benefits. However, this is an exception rather than a rule. The 2008–2009 recession was global in its effects. It resulted in a significant breakdown of the financial system, and it was both the deepest (in terms of GDP decline) and longest of the recessions since World War II. Most recessions have been far less severe than the Global Financial Crisis of 2008–2009. It will be undoubtedly stressful for stock market investors if a recession unfolds later this year or next, but history suggests that making market timing decisions based on recession predictions is not likely to add much value. LEARN MORE ABOUT RENAISSANCE
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