Stocks typically recover before recessions end

Everyone wants to know when the next recession will start and how long it will last. While each recession is painful in its own way, one potential bright spot is that they don’t historically last very long. Our analysis of 11 US cycles since 1950 shows that recessions have ranged from two to 18 months, with the average lasting about 10 months.

What’s more, stock markets usually start to recover before a recession ends. Stocks have already led the economy on the way down in this cycle, with nearly all major equity markets entering bear market territory by mid-2022. And if history is a guide, they will rebound about six months before the economy does.

The benefits of capturing a full market recovery can be powerful. In all cycles since 1950, bull markets had an average return of 265%, compared to a loss of 33% for bear markets. The strongest gains can often occur immediately after a bottom. Therefore, waiting on the sidelines for an economic turnaround is not a recommended strategy.

“It’s been a difficult year, and the pain may continue. But it’s important to keep in mind: One thing all past recessions and bear markets had in common was that they eventually ended. Ultimately, the economy and the markets will right themselves.”

<em>Darrell Spence</em>, economist at Capital Group.

Stocks have typically been a leading indicator of the economy

Industrial production measures the change in output produced by manufacturers, mines, and utilities and is used here as a proxy for the economic cycle. The “bottom” of the market refers to its trough or lowest point. It's the turning point when stocks stop falling and start rising again. A bear market is a financial market in which prices are falling, especially over a long period of time. A bull market is a financial market in which prices are increasing, especially over a long period of time. The total return is the overall actual rate of return on an investment over a given evaluation period.