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Recessions and Markets

Against the backdrop of heightened political uncertainty, potential trade wars, and lower consumer sentiment, investors may have concerns about whether the US could tip into a recession. The National Bureau of Economic Research identifies recessions using backward-looking data, so we won’t know we’re in recession until after it’s begun.

Luckily for investors, markets are forward-looking and generally react before we see slower economic growth show up in the macroeconomic data. This also means that expected stock returns are positive, even when the economic outlook is weak. This is borne out in the historical data. One dollar invested at the start of a recession saw positive returns after three years in 12 out of 13 past recessions. The average of the three-year returns after the start of a recession was 43.2%, which is nearly identical to the 41.8% average return of all three-year periods from 1947 to 2024.

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In Shaky Times, Investors Should Hold Their Nerve

When markets feel as shaky as they do now in the US, it is normal to ask: Is this time different?

After all, the S&P 500 Index is down some 4% already this year and there is considerable economic uncertainty. But anxious investors today should consider where the market was five years ago, and how well those who tuned out the noise performed.

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A Billionaire and an Oscar Winner Have Made a Hit Movie. It’s About Investing.

David Booth went to graduate school because he wanted to get a Ph.D. and become a professor.

What he learned was how to make a fortune as an entirely new kind of investor.

When he was a student at the University of Chicago a half-century ago, his teachers were future Nobel Prize winners whose curious ideas about financial markets would transform the way people think about money. Their lectures were rough drafts of the papers that showed how ordinary investors who barely touched their boring portfolios could outperform professional managers and famed stock pickers after fees and expenses. And that innovative and counterintuitive research on market efficiency would one day fuel the rise of passive investing.

It would also change Booth’s life.

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Tariffs and Stagflation

One of the concerns arising from tariff talks is the possibility of stagflation, or the combination of rising inflation and an economic contraction. But should investors act on this concern with their investments?

Since 1930, the US has seen 12 years when negative GDP growth coincided with positive changes in the consumer price index (CPI). The US stock market’s real return—its return in excess of inflation—was positive in nine out of those 12. That hit rate is close to the frequency of positive real returns across all years between 1930 and 2024, which is 68%.

This is another example demonstrating how concerns over the economy shouldn’t drive portfolio decisions. Predictions about the direction of the economy are continuously forming, but the market itself remains the best predictor of the future. That means market prices are set to levels to deliver positive expected returns even amid concerns over future economic outcomes.

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Tariff Trepidation

One of the focal points following the presidential election is the potential for an increase in tariffs applied to goods produced outside the US. Many investors have wondered what this could mean for markets.

One period offering perspective on this issue is President Trump’s first term in office. Beginning in 2017, the administration eyed China as a target and, by 2018, began imposing tariffs across a range of products. The next couple of years saw back and forth trade discussions that eventually led to an agreement, though pre-existing tariffs remained in place. Despite all this uncertainty, both China and the US posted higher cumulative returns than the MSCI World ex USA Index over the four years of Trump’s term.

Markets are forward-looking, and the economic impact from initiatives such as tariffs is likely already reflected in current market prices. When these expected developments come to pass, the effect on markets may be muted.

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