{"id":264,"date":"2022-10-17T09:00:00","date_gmt":"2022-10-17T09:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/investing-fear-stock-market-returns-recession\/"},"modified":"2025-09-05T16:42:29","modified_gmt":"2025-09-05T16:42:29","slug":"investing-fear-stock-market-returns-recession","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/investing-fear-stock-market-returns-recession\/","title":{"rendered":"In Investing, Fear Functions on a Lag: What History Tells Us About Stock Market Returns in Recessions"},"content":{"rendered":"
\n

Inflation is at its highest level<\/span><\/a> in nearly 40 years. Grocery budgets are straining<\/span><\/a> at the seams. When Russia invaded Ukraine, the West answered with \u201cI think the fuck not\u201d <\/em>plus oil sanctions that led to gas price spikes. The Fed is gluing down the button that raises rates and playing an unprofitable game of chicken with investors and borrowers alike. <\/p>\n

Basically, we\u2019re living through the 1970s<\/span><\/a> all over again\u2014and it feels like there are a lot<\/em> of reasons to be pessimistic. Media in general\u2014and financial media specifically\u2014loves<\/em> when things are going wrong, because negativity and pessimism drive far more clicks than a bland, reasonable message like, \u201cWell, it\u2019ll probably be fine.\u201d <\/p>\n<\/div>\n

\n
>
\n \u201c<\/span>Our perception of danger in the markets is highly uncorrelated with how dangerous the market actually is at any given time.\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
\n

Our brains are hardwired to perceive negativity as more truthful<\/span><\/a>, more intelligent<\/em>, and as a result, fear-mongering tends to run rampant when things seem like they are Going Very Badly\u2122. <\/p>\n

The alarmists are harmonizing the refrains of their favorite Sunday hymnal, This Time It\u2019s Different, <\/em>explaining (some with earnestly positive intentions, to be fair) that investing in the stock market right now would be a no good, very bad idea. This is usually followed by something about \u201cfiat, bitcoin fixes this, whole life insurance or bust\u201d on a droning loop. They shoot down messages of optimism as uninformed or unsophisticated. <\/p>\n

Oh, how quickly we devolved from \u201cSoftware is eating the world!<\/span><\/a>\u201d to \u201cThe only safe assets are physical bars of gold and Costco cans of Bush\u2019s Baked Beans.\u201d  <\/p>\n

When the vibes<\/span><\/a> are off, it can feel safer to heed our gut instincts that something dire is afoot, pause our contributions to our brokerage accounts, and wait it out on the sidelines. <\/p>\n

There\u2019s only one problem: Our perception<\/em> of danger in the markets is highly uncorrelated with how dangerous the market actually<\/em> is at any given time. <\/p>\n<\/div>\n

\n
\n

But\u2026is<\/em> it a \u201cno good, very bad\u201d outlook?<\/h2>\n

A few weeks ago, I saw a comment entitled \u201cHard Lessons Will Be Learned\u201d from an Anonymous Internet Opiner. They declared with certainty: \u201cThe next 40 years will not look like the last 40 years because of where we are in the big debt cycle.\u201d<\/p>\n

Ray Dalio has entered the chat. <\/em><\/p>\n

\u201cThis lacks an understanding of macroeconomic trends<\/em>.\u201d<\/p>\n

As soon as the tide turned from headlines of jpgs of rocks selling for $3 million to monkey-themed fan clubs to \u201cthe world is definitely ending\u201d in nine months flat, it seemed internet comment sections were suddenly glutted with classically trained macro economists. <\/p>\n

r\/WallStreetBets called; it wants its analysts back. <\/p>\n<\/div>\n

\n
>
\n \u201c<\/span>Fear is an emotion that functions on a lag. By the time we retail investors perceive the risk, it\u2019s usually too late to do anything about it.\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
\n

But uh, do you know when we weren\u2019t<\/em> constantly wading through accusations of economic incompetence? When frequent conversations across the web didn\u2019t<\/em> co-opt Dalio\u2019s talking points<\/span><\/a>? When people weren\u2019t<\/em> beating the end-times drums? <\/p>\n

In 2020 and 2021, when\u2014as my friend Jack pointed out in this brilliant piece<\/span><\/a>\u2014risk was technically much higher than it is today.<\/p>\n

That\u2019s the problem with our perception of danger. We think it\u2019s a lead indicator\u2014a warning sign that something bad is going to happen, and we should act (or stop acting). <\/p>\n

Unfortunately, fear is an emotion that functions on a lag. By the time we retail investors perceive<\/em> the risk, it\u2019s usually too late to do anything about it.<\/strong><\/p>\n

Back then, it was, \u201cHave fun staying poor.\u201d Today, it\u2019s, \u201cMacro trends tell us we\u2019re headed for a flat decade.\u201d <\/p>\n

The critical, pessimistic sentiment online tends to be late to the party. It probably would\u2019ve been a lot more helpful to spread a word of caution in 2021, when the S&P 500\u2019s PE ratio was pushing 40<\/span><\/a>, just about as high as it gets, rather than now<\/em>, when we\u2019re already down 25% YTD and the S&P 500 is roughly half as expensive as it was last year, with a PE ratio of around 18. <\/p>\n

Right now, stocks are within one standard deviation of the historical average<\/span><\/a> and are considered fairly valued by most measures. If anything, now<\/em> would be the time to fire up the chorus of have fun staying poor<\/em>, since the last two decades have proven that investing in something <\/em>is just about the only chance regular people have of escaping chronic wage stagnation<\/span><\/a> and declining purchasing power<\/span><\/a>.<\/p>\n

Of course, that\u2019s not to say the market won\u2019t go lower. That\u2019s not to say there isn\u2019t some <\/em>macroeconomic trouble on the horizon. That\u2019s not even to say this time it won\u2019t<\/em> be different, or that we aren\u2019t<\/em> headed for a flat decade\u2014just that, all things considered, most of these doomsday Paul Reveres are about a year late. And ultimately? Nobody actually knows<\/strong>. <\/p>\n

Even if bad things are<\/em> ahead (like catastrophic events of the past that preceded recessions from which the stock market eventually recovered\u2014a Great Depression, a housing market implosion, a massive terrorist attack, a Gulf War, an oil embargo, or\u2026well, I think you get the picture<\/span><\/a>), we have a relatively solid idea of what typically happens when shit goes awry at scale, thanks to the last 100 years.<\/p>\n<\/div>\n

\n
\n

Stock market returns through recessions are less predictable than you\u2019d probably expect<\/h2>\n

As much as I wish past performance was indicative of future returns\u2026it\u2019s not. That said, history is just about the only (hazy) crystal ball we\u2019ve got for understanding a probable range of outcomes<\/em>.<\/p>\n

Moreover, the stock market is forward-looking\u2014it\u2019s not reacting to what\u2019s already happened in the same way that our flighty amygdalas are. It\u2019s anticipating what\u2019ll happen six or 12 months down the road, which means it usually goes down before a recession actually starts (and usually improves before a recession ends). <\/p>\n

And one of the key recession indicators\u2014high unemployment<\/span><\/a>\u2014isn\u2019t really happening yet. (The technical language for this phenomenon is the \u201crecession isn\u2019t recessioning,\u201d and J-Pow & the Fed Boiz are probably going to keep hiking rates until it does.)<\/p>\n

This is why a strong jobs report<\/span><\/a> actually made the stock market react negatively<\/em><\/span><\/a>, because a strong-ish economy probably means more rate hikes. The market\u2014comprising a bunch of smart, greedy people\u2014is pricing in something it\u2019s expecting<\/em> to happen in the next few months. (You\u2019ll never convince me the stock market isn\u2019t just a mood ring in the short term.)<\/p>\n

The chart below shows us that the range of drawdowns during recessionary periods in the last 72 years was between -14% and -57% (woof). But it also<\/em> shows us the returns on cash invested at or around the low point two years after each \u201cbottom,\u201d ranging from 5% to 99%. (This means a dollar invested during the market\u2019s lowest point in a recessionary plunge returned anywhere from 5% to 99% in the two years that followed.)<\/p>\n<\/div>\n

\"

Chart courtesy of Yahoo! Finance.<\/p><\/div>\n

\n

These ranges are about as wide as they come. The median drawdown, however, is -24%, which is approximately where we are right now<\/em>. <\/p>\n

The point isn\u2019t to estimate how bad it\u2019s going to get\u2014there are far too many variables for that\u2014but to exemplify the fact that it\u2019s almost impossible to know<\/em>. There\u2019s no discernible pattern to extrapolate forward. <\/p>\n

Is this the bottom? Who knows? The macro buffs would tell you we have much<\/em> farther to fall (because of money printing, because of war, because of inflation, because of Jerome\u2026or because negative press is what gets clicks), but nobody actually knows<\/em>.<\/p>\n

The one thing that is<\/em> clear from this data is that the money you invested through every recessionary bottom in history always looks all right two years later<\/strong>, and the only way to guarantee you invest at the bottom is to invest through all of it<\/em>.<\/p>\n

Might as well bet on 100 years of historical precedent if you\u2019re going to bet on anything. As Jack Raines wrote: \u201cRisk is highest when we forget it exists, and lowest when it\u2019s all we can think about.\u201d<\/p>\n

Maybe the Bear Bros will rejoice from their alternative asset classes that they were right and the dumb, optimistic masses were wrong\u2014but if you\u2019re coming to that conclusion in October 2022, you\u2019re probably too late to do anything about it anyway. <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Inflation is at its highest level in nearly 40 years. Grocery budgets are straining at the seams. When Russia invaded Ukraine, the West answered with \u201cI think the fuck not\u201d plus oil sanctions that led to gas price spikes. 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