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Economic downturns can feel scary, especially when considering one’s own financial well-being. ‘If the market falls, can I retire on time?’ Or, ‘I’ve worked too hard to see my wealth disappear like this.’ Or, ‘If I lose my job, how far will that set me back?’
Uneasiness is completely justified under dire economic conditions.
However, if/when the economy turns for the worst, all is not lost. You can use these opportunities to your advantage. You can even come out ahead if there were no recession at all.
We are starting to see soft economic data releases. Consumer confidence measures have been falling, and inflation expectations have been rising. Hard data, yet to come in, might or might not confirm the idea that our economy is doing worse, not better. We will find out soon enough.
All of this points to the rising probability that stagflation might return—the combination of high inflation, stagnant economic growth, and high unemployment. We haven’t experienced this since the 1970s. It isn’t that great of an experience.
But an economic downturn can offer a unique opportunity. The question isn’t simply whether you should invest during a recession—it’s whether you are able to invest during a recession. Everyone thinks they have the stomach to pull the trigger. When the time comes, it’s not always so easy to do.
The Economy is Always Late to the Game
Nobody feels good about buying stocks when people are losing their jobs. But it can be the best thing you can do for your wealth. History shows that if you buy stocks when the unemployment rate peaks, it vastly outperforms if you were to buy stocks when the unemployment rate bottoms out.
If we look at the unemployment rate throughout history, it has peaked above 7% eight times and subsequently bottomed out below 5% eight times. Using these data points as unemployment rate peaks and troughs, we can distinguish that the stock market tends to be a forward-looking indicator, while unemployment is a lagging measure. In other words, by the time the job market starts showing signs of recovery, the market’s rebound is often well underway.
- After the Unemployment Bottom: Five years after unemployment reaches its lowest point, the S&P 500 has historically returned an average of about 25.3%.
- Following the Unemployment Peak: Conversely, in the five years after unemployment hits its peak, the market has delivered an average return of roughly 72%.
For example, during the Great Recession, unemployment peaked in early 2010. However, the S&P 500 had already bottomed out in March 2009 and then began a steady recovery. This counterintuitive sequence meant that those who invested when the unemployment numbers were at their worst—when the market was undervalued—reaped far greater rewards than those who waited for the economy to improve visibly.
In short, the economy is like a rearview mirror—by the time you see what’s behind you, the stock market has already driven ahead.
Don’t get left behind.
Listen to Baron Rothschild
Think about what it feels like during a recession. People are nervous, likely overwhelmed with different emotions. The mood is somber, and people are uneasy. The news is filled with rising unemployment, shrinking GDP, and a crashing market. Jim Cramer is losing his mind on CNBC, telling you which stocks to buy and which to sell.
Some people will likely sell some or all of their stock positions. Or they will do nothing. Very few will buy more stocks. Most people will wait until the economic data improves before they buy, which we now know is a mistake.
Risk aversion is a natural reaction in uncertain times. Many adopt a wait-and-see approach, tightening budgets and delaying major financial decisions, driven by a strong urge to protect what they have rather than risk further uncertainty.
It’s not instinctive to invest in an environment where every headline screams caution. Our evolutionary wiring tells us to steer clear of danger—just as we instinctively flee from a lion in the wild, we’re conditioned to put distance between ourselves and perceived financial threats.
However, it is during these moments that you can earn a handsome return on your capital. As Baron Rothschild said, “The time to buy is when there’s blood in the streets.”
So, should you invest during a recession? Yes, probably. Will it be easy? No, probably not.
Though consider these points:
- Undervalued Assets: Economic downturns can drive even strong, well-known companies to sell at discounted levels, offering savvy investors the chance to purchase quality stocks at attractive values. It’s like discovering a designer watch at an estate sale—you’re getting the same exceptional quality, but for a fraction of its usual price.
- Patient Investing Pays Off: The data doesn’t lie. Investors who bought into the market during past downturns, such as the 2008 recession, have seen substantial long-term returns as the market recovered. There will always be another crisis ahead of us. Just be prepared to act when it occurs.
- Economic Darwinism: Tough economic times tend to weed out weaker companies. In contrast, resilient market leaders often emerge stronger, making them attractive long-term investments. Think of iconic brands that have not only survived but thrived after downturns.
Investing during a recession isn’t about taking reckless risks. It’s about understanding that a temporary dip in the market can offer a chance to build wealth over time.
We are not yet in a financial crisis. Nowhere near one. Though we will experience one at some point. This is not a prediction given the current financial situation . I am simply a realistic look at human nature. We are fantastic at over-leveraging ourselves.
Your ability to capitalize on these scenarios will depend on your financial situation, risk tolerance, and long-term goals. The market’s forward-looking nature means that temporary setbacks can lead to significant gains down the road if you’re willing to hold on for the long term.
If you have any questions or if you think we can help you achieve your goals, please do not hesitate to contact us. We are more than happy to help.
