Do stocks go down in a recession? A practical guide

Do stocks go down in a recession? A practical guide

Short answer: Stocks often fall around recessions, but not always — magnitude, timing and sector performance vary. Markets are forward-looking, so declines frequently begin before an official recession is declared.

As of June 2024, this article synthesizes institutional research and historical analysis to explain how public equities (U.S. stocks such as the S&P 500 and individual US equities) typically behave around recessions, why they move, what sectors tend to outperform or underperform, and practical steps investors can consider. This guide references institutional sources including Fidelity, Charles Schwab, PIMCO, Motley Fool, Kathmere Capital, Hartford Funds, US News / Investing, Qtrade and Pinnacle Financial (see Data & Further Reading). It is educational and not investment advice.

Do stocks go down in a recession? That question matters to long-term investors, retirees, portfolio managers and crypto users who are monitoring correlations between macro cycles and risk assets. This article will help you understand historical patterns, common indicators, portfolio actions to manage risk, and special considerations for income-dependent investors.

Definitions

Recession

A recession is a sustained, broad-based decline in economic activity. Common definitions include:

• A GDP contraction across consecutive quarters (used in some official and market commentary).
• The U.S. National Bureau of Economic Research (NBER) business-cycle dating committee, which labels peaks and troughs in economic activity using multiple indicators (employment, industrial production, real income, wholesale-retail sales). NBER dating is retrospective and often published months after a cycle turns.

Typical features of recessions: rising job losses, falling consumer spending and business investment, widening credit spreads, and lower industrial output.

Correction and bear market

• Correction: a market decline of roughly 10% from a recent high. Corrections are common and can be short-lived.
• Bear market: commonly defined as a 20% or greater drop in a major index (for example, the S&P 500) from its prior peak. Bear markets frequently coincide with recessions but are not identical: some recessions have seen modest equity declines, and some severe equity drawdowns have occurred without a formal recession.

Historical relationship between recessions and the stock market

Empirical overview

Historically, recessions and equity returns show a relationship but with notable variability. Broad findings from institutional analyses include:

• Kathmere Capital's empirical review reports average peak-to-trough equity declines in recession episodes near the order of ~30% (peak-to-trough for major indices), though individual episodes vary widely.
• As of June 2024, Fidelity highlights that since 1950, several U.S. recessions did not coincide with large negative calendar-year returns for the S&P 500 — in fact, Fidelity notes that 5 of 11 post‑1950 recessions produced positive S&P 500 returns in the recession year. This demonstrates that recession ≠ guaranteed deep equity losses.

These findings underline that recessions are associated with elevated risk for equities but not a single deterministic outcome.

Timing patterns: markets lead the economy

Markets are forward-looking and price expected future earnings. Empirical timing patterns include:

• Equity indices often peak before the technical start of a recession. Some studies find median market peaks occurring several months ahead of the official NBER recession start — Kathmere reports a median of roughly 8 months in some analyses.
• Market troughs can occur before, during, or after an official recession trough because investor expectations, policy responses and earnings revisions drive price discovery.

In short, declines can begin ahead of macro deterioration and recoveries can begin before the economy registers improvement in lagging indicators like employment.

Notable historical episodes

• Dot-com bust (2000–2002): A prolonged bear market driven by collapsing tech valuations and weak earnings. Peak-to-trough declines exceeded 40% for major indices and some sectors experienced deeper losses.
• Global Financial Crisis (2007–2009): Severe economic contraction with a deep equity drawdown (roughly 50% peak-to-trough on the S&P 500), banking-sector stress and liquidity squeezes. Policy responses and balance-sheet repair defined a protracted recovery.
• COVID-19 shock (2020): A very sharp, short recession with an extremely fast equity drawdown in late February–March 2020 followed by a rapid rebound aided by aggressive monetary and fiscal policy. This episode shows how policy response and the nature of the shock affect market outcomes.

Each episode had different drivers (valuation excesses, financial-sector breakdown, exogenous health shock) and produced different equity behaviors.

Why stocks tend to decline (economic and financial mechanisms)

Earnings expectations fall

Recessions reduce demand and profits. Lower expected corporate earnings reduce the present value of future cash flows and depress equity valuations.

Discount rates and risk premia change

Central-bank interest-rate moves, shifts in term premia, and increased equity risk premia raise discount rates applied to future cash flows. Higher discount rates lower valuations even if earnings declines are moderate.

Investor behavior and liquidity effects

During economic stress, investors often shift to safer assets (flight-to-quality). Forced selling, margin calls, and widening credit spreads can amplify price declines as liquidity evaporates in stressed markets.

Forward-looking pricing

Markets incorporate recession expectations before many macro variables decline. When new data confirms a worsening outlook, prices can fall further — or, if policy actions reassure markets, prices can stabilize.

How large and how long are stock declines in recessions?

Typical magnitudes and durations

Historical studies provide ranges rather than precise predictions:

• Median or mean peak-to-trough declines in major U.S. indices around recessions are often in the tens of percent. Kathmere Capital's review cites values near a ~30% average decline across episodes, though some recessions produced much larger declines and some much smaller ones.
• Bear-market durations vary: some are months (2020) while others stretch multiple years (2000–2002, 2007–2009).

Variation across episodes

Severity depends on starting valuations, the shock’s origin (financial vs. demand vs. supply), policy responses (fiscal and monetary), and corporate balance-sheet health. For instance, a liquidity-driven financial crisis tends to produce larger and longer equity declines than a shallow demand-driven slowdown with strong policy support.

Sector and asset-class performance during recessions

Defensive vs cyclical sectors

• Defensive sectors (consumer staples, utilities, healthcare) tend to outperform or decline less in recessions because demand for their products is more stable.
• Cyclical sectors (consumer discretionary, industrials, materials, financials) are more sensitive to economic cycles and typically underperform.

US News / Investing and Motley Fool list examples of companies and sectors that historically held up better in downturns: discount retailers, essential consumer goods producers, certain healthcare businesses and regulated utilities. As of June 2024, these patterns remain commonly observed.

Fixed income and alternatives

• Core government bonds (U.S. Treasuries) often act as safe havens and can deliver positive returns early in recessions as yields fall amid policy easing and flight-to-quality flows.
• Riskier credit (high-yield bonds) typically underperforms as default risk rises.
• Alternatives (real assets, defensive real estate, gold) can diversify equity risk but show variable performance across episodes.

PIMCO's recession analyses emphasize asset-class rotation during recessions: early-stage recessions may favor government bonds, while later stages can create selective opportunities in credit and equities depending on stress and valuations.

Examples of recession-resistant stocks

Companies with stable cash flows, low leverage and essential products/services — discount or value retailers, consumer staples, utilities and certain healthcare providers — have historically shown resilience. Lists of recession-resilient stocks vary by study; investors should evaluate company fundamentals rather than relying on labels alone.

Indicators and market signals around recessions

Leading economic indicators

• Yield-curve inversion (short-term rates above long-term rates) has historically preceded recessions, though timing and predictive power vary.
• Employment trends: rising jobless claims and falling payrolls are important signals.
• Corporate earnings revisions and profit warnings can presage equity weakness.
• Credit spreads: widening spreads reflect rising stress and can signal risk-off phases.

Market signals

• Volatility spikes (VIX and realized volatility) often increase at recession onset.
• Sector leadership changes: defensive sectors outperform; cyclical sectors underperform.
• Elevated correlations across risky assets, and flows into safe-haven assets (government bonds, cash), are common.

Investor implications and recommended strategies

The following are educational considerations, not personalized investment advice.

Risk management and emergency savings

• Working-age investors are often advised to hold 3–6 months of living expenses in liquid cash. Charles Schwab and Fidelity commonly reiterate this guidance.
• Retirees and income-dependent investors should consider larger buffers (multiple years of withdrawals) to avoid selling assets during market lows.

Portfolio construction

• Diversification across asset classes (equities, government bonds, high-quality corporate bonds, alternatives) helps reduce concentration risk.
• Defensive tilts (higher weight to staples, utilities, healthcare) can reduce portfolio volatility but may also reduce upside in recoveries.
• Maintain a strategic allocation plan and rebalance periodically rather than attempting to time markets.

Behavioral guidance

• Avoid panic selling. Historically, selling near market lows can lock in losses and miss recoveries.
• Dollar-cost averaging can reduce timing risk for new capital deployed during volatile periods.

Active management considerations

• Active fixed-income managers and selective credit strategies may add value in identifying credit dislocations, but fees, liquidity and manager skill matter.

Charles Schwab advises practical steps for weathering recessions (cash buffers, review of expenses, disciplined rebalancing). Fidelity underscores the long-term recovery tendency of equities over multi-year horizons while warning of short-term volatility.

Practical timing and entry considerations

Why "buy the dip" is not mechanically safe

Markets are forward-looking. A dip can continue if earnings forecasts deteriorate or policy is insufficient. Automatic rules should align with risk tolerance and liquidity needs rather than headline-driven impulses.

When opportunities arise

Prolonged selloffs can create favorable long-term entry points for investors with sufficient liquidity and a multi-year horizon. Opportunistic investors may find higher expected returns when valuations fall and credit stress abates, but patience and careful selection are essential.

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Common misconceptions

• “Recession always equals deep bear market” — False. Some recessions have coincided with modest or even positive equity returns during the calendar year of the recession.
• “Market bottoms coincide with recession troughs” — Not necessarily. Market bottoms can precede or follow official recession troughs because markets price expected improvements or further deterioration earlier than economic data captures.

Special considerations for retirees and income-dependent investors

Withdrawal and liquidity risk

Retirees who rely on portfolio withdrawals face sequence-of-returns risk: negative returns early in retirement can reduce long-term portfolio sustainability. Maintaining a larger cash cushion (e.g., 1–3 years of withdrawals) can allow an investor to avoid selling equities at depressed prices.

Income strategies

Dividend-focused allocations and bond ladders can provide income stability, but investors must assess credit risk and duration exposure. During recessions, returning to high-quality, low-duration fixed income and defensive equities typically reduces immediate income volatility but may reduce yield.

Summary and practical takeaways

• Do stocks go down in a recession? Often, yes — but not always. The size, timing and sector distribution of declines vary by episode.
• Markets are forward-looking: price declines frequently start ahead of official recession start dates; recoveries may begin before macro data improves.
• Prepare with adequate liquidity, diversification, and a clear plan for rebalancing. Retirees should hold larger cash buffers to avoid forced sales.
• Defensive sectors historically outperform, while cyclical sectors underperform — but outcomes depend on the recession’s cause and policy response.
• Use disciplined processes rather than emotional market timing; consider professional advice and, where appropriate, features from Bitget (exchange services and Bitget Wallet) for trade execution and custody needs.

Frequently asked questions (short Q&A)

Q: Do stocks always fall in a recession? A: No. Stocks often fall around recessions, but some recessions saw modest or positive equity returns. Historical patterns vary.

Q: When do stocks typically bottom relative to a recession? A: There is no fixed rule. Markets can bottom before, during or after the official recession trough — timing depends on expectations, policy and earnings revisions.

Q: Should I sell before a recession? A: Selling to avoid a recession is a timing decision with risks. For many long-term investors, maintaining a diversified, strategic allocation and sufficient liquidity is preferable to attempting market timing.

Q: Which sectors are safest in a recession? A: Defensive sectors — consumer staples, utilities, healthcare — historically show greater resilience, though company-level fundamentals matter.

Data, studies and further reading (selected sources)

• Kathmere Capital — "Recessions and the Stock Market" (empirical analysis). Source provides peak‑to‑trough statistics and timing patterns across recession episodes. As of June 2024, Kathmere’s analysis is a frequently cited empirical review for peak-to-trough and pre-recession market peak timing.
• Fidelity — "What happens in a recession?" and "Bear markets explained and definition." As of June 2024, Fidelity’s investor guidance includes historical S&P 500 performance in recession years and recommendations on emergency savings.
• Charles Schwab — "5 Tips for Weathering a Recession." As of June 2024, Schwab’s guidance emphasizes liquidity, rebalancing and practical planning for investors.
• PIMCO — "Recessions: What Investors Need to Know." PIMCO provides a framework for asset-class performance across recession stages and policy-response scenarios.
• Motley Fool — "What to Invest In During a Recession." Offers sector and stock examples that have historically outperformed in slowdowns. As of June 2024, Motley Fool articles synthesize company examples and sector behavior.
• US News / Investing — "7 Stocks That Outperform in a Recession." Provides lists of historically resilient companies and sector examples.
• Qtrade — "Concerned about a recession? Here's what you need to know." Investor education on risk management and portfolio considerations.
• Pinnacle Financial / PNFP — Market commentaries on investor sentiment during downturns.
• Hartford Funds — "10 Things You Should Know About Recessions." Broad investor-focused primer.

Readers who want original charts and datasets should consult these institutions’ published analyses and official index series (S&P 500 historical data) or NBER business-cycle dates.

Notes on methodology and limitations

This article summarizes historical relationships between recessions and markets and synthesizes guidance from institutional sources. Historical patterns are conditional on the data and period analyzed; past performance is not predictive of future outcomes. NBER recession dating is retrospective, and market timing is inherently uncertain.

External references and citation notes

As of June 2024, several institutional sources (Fidelity, Charles Schwab, PIMCO, Kathmere Capital) report the patterns described above. For primary datasets, consult official index histories (S&P 500) and NBER business-cycle dates. This article does not include external hyperlinks; readers may search the listed organizations for original publications and datasets.

If you want tools for execution or custody while you plan portfolio adjustments, explore Bitget exchange services and Bitget Wallet for custody and trading options tailored to varying risk profiles. For educational resources, consult the platform’s learning center and institutional research summaries.

Further exploration: review the Kathmere Capital peak-to-trough analysis, Fidelity and Schwab guidance on emergency savings, and PIMCO asset-class notes to match portfolio positioning to your time horizon and liquidity needs.

As of June 2024, according to Fidelity, five of the 11 U.S. recessions since 1950 produced positive S&P 500 returns during the recession year. As of June 2024, Kathmere Capital’s empirical review reported average peak-to-trough equity declines near ~30% across historical recession episodes. As of June 2024, Charles Schwab recommended maintaining 3–6 months of cash for most working-age investors and larger buffers for retirees. These statements summarize publicly available institutional commentary as of the stated date.