Broker Check

Equity Returns and Economic Recessions

| November 01, 2022

The idea of an economic recession carries a sense of fear among investors. Is that fear rationally justified? Perhaps. A “technical” recession becomes reality after two consecutive quarters of contracting gross domestic product (GDP) growth. In actuality, the National Bureau of Economic Research (NBER) identifies a recession as a significant decline in economic activity that is spread across the economy and lasts for more than a few months. Monthly indicators assessed, in addition to GDP, include real personal income, employment, real personal consumption expenditures, retail sales, and industrial production. It’s very difficult to know when the economy enters a recession given that such indicators lag economic activity by 1-3 months. For most investors, correlating poor equity market returns amidst a recession is an expected outcome and has historically occurred, although not always. The data in the table below depicts the total return of the MSCI World Equity Index during U.S. recessions and also provides total return data for the 3 and 24 months following the end of the recession. The main takeaways from this analysis focus on three important, yet largely ignored, facts. First, the notion of economic recessions will not go away. Recessions are part of a healthy business cycle. Their severity will tend to deepen on bubble-like factors, yet the vast majority of recessions have been historically mild. As we gauge current economic activity, we do not see excess prudential risks such as those exhibited during the Dot-Com Bubble or Great Financial Recession. The second takeaway is that trying to time recessions, and therefore equity markets, is not possible. Since recessions are announced 3-6 months after they’ve started, the idea of decreasing equity market participation is not a rational approach to long-term success. Instead, a continuous approach to risk management across a multiple strategy platform is often the best approach, in our opinion, to assess and take advantage of risk opportunities presented during the entire market cycle. Lastly, the idea of increasing equity market participation following the announcement of a recession has historically led to favorable total returns, as evidenced in the table below.


Annual Volatility

Volatility is almost always associated with losing value. Although that’s true for those investors that willfully liquidate their holdings, long-term investors have historically seen tremendous benefits from times of equity market stress, as depicted by the FTSE All World Equity Index. By recognizing the natural and healthy cycle of volatility, and accepting its frequency and potential magnitude, investors have the ability to acquire equity exposure at a discount. By employing objectivity and rational analysis, volatility has the ability to enhance long-term returns.


Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.
All data is sourced from Bloomberg, through the release of monthly figures from the U.S. Bureau of Labor Statistics or from the Federal Reserve and any of its affiliated regional locations.