Understanding how stock markets work and how they have performed during recent sessions can educate investors about the potential stock value outcomes if we have a recession, writes Peter Watson.
Will stock values plummet if we have a recession?
That is a major question for many investors who worry that the current trade war with the US will result in a recession.
I will break that topic down into two parts.
First, consider what the driving force is in determining stock values and second to look at history to see if we can learn from the past.
The stock market is forward-looking. Investors predict the future profitability of stocks. If the conclusion is good times are ahead then stock markets usually appreciate.
History can help us understand this by looking at the value of US stocks at the start of a recession and then the value of those stocks three years later. This information is taken from the Fama/French Total US Market Research Index 1947 until 2024.
Stock values at the start of a recession had positive returns three years later in 12 of the 13 recessions. The average return during that three-year period was 43 per cent. That is an annual increase of 14 per cent.
Prior to the starting date of the recession stock markets can have volatility and lose value. Investors are used to volatility and its occurrence with stocks is normal.
We should acknowledge that if a recession is declared it will trigger the normal negative reactions it usually does. That is because our human instincts are very uncomfortable with the term recession.
My recommendation is to manage your investments to fit your financial situation and objectives. Look to history to see normal patterns in stock market investing.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
