The word "recession" triggers fear. Headlines scream about it. Social media panics about it. And many beginner investors make their worst decisions because of it.
Here is what a recession actually is and why it matters less than most people think for long-term investors.
What a Recession Is
A recession is generally defined as two consecutive quarters of declining gross domestic product (GDP). The National Bureau of Economic Research (NBER) uses a broader definition that considers employment, income, and other indicators.
In simpler terms: a recession is a period when the overall economy is shrinking instead of growing.
How Often They Happen
Recessions are a normal part of the economic cycle. The US has experienced about 12 recessions since World War II. They are not rare events. They happen roughly every 7 to 10 years on average.
Most last between 6 and 18 months. The economy has always recovered and eventually reached new highs after every recession in US history.
How Recessions Affect the Stock Market
Stock markets usually decline before and during recessions. This makes sense: when the economy contracts, company revenues tend to fall, unemployment rises, and consumer spending decreases.
However, stock markets are forward-looking. They often start declining before a recession is officially declared and start recovering before the recession officially ends.
This is why trying to "time" the market around recessions is so difficult. By the time everyone agrees a recession is happening, much of the decline may have already occurred.
What Beginner Investors Should Know
Recessions are temporary. Every single recession in US history has ended. The economy has always recovered. This does not mean the next one will be painless, but historical context matters.
Market drops during recessions are normal. The S&P 500 has historically declined 20% to 35% during recessions. This is scary in the moment but has always been followed by eventual recovery.
Selling during a recession locks in losses. If you sell during the decline, you guarantee a loss. If you hold through it, you give yourself the chance to participate in the recovery.
Recessions can create opportunities. When prices are lower, the same amount of money buys more shares. For long-term investors who are still years or decades from retirement, buying during a recession (if you have the cash and emotional tolerance) can be advantageous.
What Not to Do
- Do not panic sell based on headlines
- Do not try to predict exactly when a recession will start or end
- Do not make major financial decisions based on fear
- Do not assume this time is different (people say this every time)
The Bottom Line
Recessions are a normal, recurring feature of the economy. They are uncomfortable, but they are not permanent. For long-term investors, the most important thing is to have a plan before a recession hits and to stick to it during one.
The Progressive Trailblazer integrates FRED economic data to help you understand macroeconomic conditions alongside your company research. Educational only. Not financial advice.