Annualized returns are POSITIVE, even after entering a recession

Yes, you read that correctly – annualized returns are POSITIVE, even after entering a recession. Just check out the graphic and info below from Dimensional if it seems unbelievable!

From economists to rideshare drivers, it seems that many are fretting over the looming possibility of a recession. Markets may be in agreement, as we have already experienced a drop in stocks that some attribute to expectations of a recession. But investors should avoid the temptation to abandon equities and go to cash as equities have a history of positive performance in the years following a recession’s onset.

According to the National Bureau of Economic Research (NBER), there have been 12 recessions since 1947. The S&P 500 returns following the start of those recessions have generally been positive and similar to all months, especially for the longer 3- and 5-year time periods. How can that be?

If markets are anticipating a recession, it’s already been embedded in prices. Markets are forward-looking: stock prices incorporate not only an evaluation of days past but also expectations for the future. Plus, recessions are declared with several months delay, so markets have often readjusted to deliver positive returns shortly after the start of a recession. When it comes to recessions, it’s not clear your portfolio needs to make concessions.

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Returns data based on monthly S&P 500 Index returns from January 1947 to December 2022. Returns are calculated for the 1-, 3-, and 5-year look-ahead periods for all months and post-recession start months. There are 12, 11, and 11 observations for the 1-, 3-, and 5-year look-ahead periods, respectively. The sample start date is based on quarterly US gross domestic product data, a key measure used to identify changes in economic activity across the business cycle, that is first available starting in 1947. Business cycle recession dates sourced from the National Bureau of Economic Research (NBER). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

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