What Is a Recession and How Does It Affect Investments?
Recessions cause job losses and fear. But for long-term investors, they also create buying opportunities. Here is the data.
Don't have time? Here's what you need to know:
- 1Recessions are temporary (average 10 months) and always followed by economic expansion
- 2The S&P 500 drops an average of 29% during recessions but has recovered 100% of the time
- 3Shares bought during recessions produce the best long-term returns in any portfolio
- 4Protect yourself with a solid emergency fund first, then keep investing through the downturn
A Recession Is a Temporary Economic Contraction
A recession is a significant decline in economic activity that lasts more than a few months. The National Bureau of Economic Research (NBER) officially declares recessions by examining employment, industrial production, and GDP. Since 1945, the U.S. has experienced 12 recessions averaging 10 months in duration. The shortest (2020 COVID) lasted 2 months. The longest (2007-2009 Great Recession) lasted 18 months.
Recessions cause job losses, reduced consumer spending, and corporate earnings declines. Stocks typically fall before or during the early phase of a recession as investors anticipate weaker profits. But markets also tend to recover before the recession officially ends — stocks are forward-looking and start pricing in the recovery while the economy still looks bad.
How Recessions Affect the Stock Market
*The 2001 recovery took longer because the market was coming off an extreme valuation bubble. Investing at the bottom of any recession has historically produced strong returns over the following 3-5 years.
| Recession | S&P 500 Drop | Time to Recover | Returns 3 Years After Bottom |
|---|---|---|---|
| 2020 COVID | -34% | 5 months | +90% |
| 2007-2009 Great Recession | -57% | 4 years | +95% |
| 2001 Dot-com | -49% | 7 years* | +45% |
| 1990-1991 | -20% | 4 months | +52% |
| 1981-1982 | -27% | 2 years | +65% |
How to Invest During a Recession
First: make sure your emergency fund is solid. Recessions mean job losses. Having 3-6 months of expenses in a high-yield savings account is your first line of defense. Do not invest money you might need if you lose your job.
Second: keep investing regularly. Your monthly contributions buy more shares at lower prices, which produces higher returns when the recovery comes. If you can afford to increase your contributions during a recession (easier said than done), the math strongly rewards it. The shares bought at the 2009 bottom tripled within 4 years and have grown 6x by 2024.
Tip: Recessions feel terrible while they are happening. But looking at a 30-year chart, they are small dips in a long upward line. The perspective changes everything.
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Frequently Asked Questions
Should I sell stocks before a recession hits?
No one can reliably predict recessions in advance. By the time it is obvious that a recession is happening, the stock market has usually already dropped. And by the time the recession is officially declared (often months after it started), stocks may have already begun recovering. Staying invested is the consistently winning strategy.
Are bonds safe during a recession?
Generally yes. Government bonds (Treasuries) often rise during recessions as investors seek safety and the Fed cuts interest rates. BND gained 5% during the 2008 crisis while stocks lost 37%. However, 2022 showed that rising rates can hurt bonds too — context matters.
How long do recessions typically last?
The average U.S. recession since 1945 has lasted about 10 months. Expansions (the growth periods between recessions) average about 5 years. The economy spends far more time growing than contracting.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.