Investors are nervous about a recession hitting in the next 12 months. If it happens, history tells us that stocks have actually done pretty well.
The media is ramping up the recession fear mongering and investors are getting nervous.Today, I am going to discuss two things.
#1 what is the probability of a recession in 2020?
#2 if we do see a recession, what happens to stocks?
What is the Probability of a Recession?
I see the probability of a recession in 2020 as low – less than 20% – because of a few key reasons.
The US economy has grown at its fastest pace in 10 years for the last two years because of the tax cuts and growing business confidence.
The pace of growth is expected to cool in 2019 and 2020. However the Conference Board, a global, well respected independent market research firm is still projecting very solid GDP growth of 2.7% in 2019 and 2.1% in 2020. Take a look below.
In the world of US GDP growth anything above 3.0% is considered excellent. So a drop into negative territory from a projected 2.1% in 2020 would be a very big slowdown.
What about all these tariffs?
No doubt this is a threat to the pace of economic growth and US stocks. But I still don’t think the US economy will contract into negative territory because of it.
And if the US gets a trade deal with China? All bets are off – the US economy and global stocks should do very well.
What Happens to Stocks in a Recession?
I’m hoping we don’t see a recession – but even if we do its hardly a doomsday scenario for stocks. History shows that US stocks have actually performed pretty well during recessions.
Since the late 1940’s there have been a total of 11 recessions in the US. The average length of the recession is 11 months.
During that time, the average return of US stocks is 0% – and in six of those 11 recessions stocks actually rose.
However – that average return is skewed by the 2009 financial crisis and deep recession when stocks fell 37%. When stripping out that big 37% loss the average stock return during a recession rises to 3.4%.
Take a look at the table below to see the returns.
What you can also see in the chart is that the period before the economy enters a recession is typically the worst period for stocks.
But this still hardly looks like a doomsday scenario.
The average return on US stocks 1-6 months before a recession is -3.2%.
The average return on US stocks 1-12 months before a recession is -3.4%.
Here’s the Conclusion on US Recessions and Stocks
- Recessions are a normal part of the economic cycle.
- They happen in the US on average once every 11 years.
- The last time we saw one in the US was 2009, only 10 years ago.
- Even if the US economy does fall into a recession its not a death sentence for stocks.
- US stocks are typically weakest in the six months leading up to a recession.
- From there they stabilize – and then rally as the economy rebounds.
Here’s My Advice on How to Proceed
If you’re nervous about the US economy and stocks, there’s nothing wrong with de risking the portfolio.That includes:
- Shifting out of growth stocks and into dividend stocks.
- Adding bonds.
- Building a cash position.
If anyone has questions please drop in and say hello.