Recessions: What Investors Need to Know (2024)

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Understanding Investing

The old adage “what goes up, must come down” aptly describes a dynamic economy that has historically followed a cycle of growth and decline. The down period in that cycle constitutes a recession, which affects investment returns across various asset classes. For this reason, investors may benefit from understanding what a recession is, what causes it, and the steps to take as economic conditions change.

WHAT IS A RECESSION?

A recession is a period of significant decline in economic activity that may last for months or years. Typically, a recession is marked by falling productivity, investments and business profits, as well as rising unemployment.Footnote1

At any given time, the economy, which is made up of a country’s aggregate production and consumption, follows a pattern of activity often referred to as the business (or economic) cycle.

Consider the following:Footnote2

  • Historically, recessions have been a natural part of the economic cycle, occurring every 3.25 years in the U.S.
  • Between 1945 and 2019, the average U.S. recession lasted approximately 11 months, while the economic expansion that followed lasted an average of 65 months.

As Exhibit 1 shows, the business cycle starts during a period of economic growth, followed by a slowdown. After economic activity reaches its lowest point, or trough, it picks up again until it reaches its highest point. Once activity drops from the peak, this signals the start of a recessionary period.

Recessions: What Investors Need to Know (2)

WHAT FACTORS CAUSE A RECESSION?Footnote3

The nature and causes of U.S. recessions have varied, and have been generally characterized by a decline in consumer and business spending. Consumer spending greatly affects economic activity, accounting for 68% of U.S. Gross Domestic Product (GDP).Footnote4

Some examples of the causes of recessions include:

  • Unforeseen events – such as the 2020 COVID-19 global pandemic and geopolitical crises, which impacted supply chains and business activity
  • Oil shocks/energy crises – rising oil prices in 1973 and 1980, which contributed to high inflation, as shown in Exhibit 2
  • An overheated economy – characterized by low unemployment, rising inflation, and asset valuation bubbles, which may cause central banks worldwide to tighten financial conditions by raising short-term interest rates; examples of asset valuation bubbles that led to recessions included the dotcom bubble in 2001, and the real estate bubble that led to the 2008 Global Financial Crisis

Exhibit 2 shows U.S. recessions from the 1950s through 2020 and the various economic variables (measured at the peak of the business cycle) that contributed to recessions, including changes in inflation, oil prices, interest rates, credit/debt to GDP, and real (inflation-adjusted) corporate earnings.

The table’s shaded areas highlight the years with the highest increases for inflation, oil prices, interest rates, and credit/GDP, as well as the years with the steepest declines in real corporate earnings growth.

Recessions: What Investors Need to Know (3)

HOW DOES A RECESSION AFFECT INVESTMENT RETURNS?

Exhibit 3 shows that recessionary periods have affected asset classes differently, with some outperforming others.

The first half of a recession (shown on the right) is typically marked by a decrease in economic activity from its late cycle stage “peak”, as measured by analyzing growth, inflation and unemployment data. During the first half of a recession stage, core bond returns (i.e., Treasuries and investment-grade securities) are historically positive, while returns for high yield bonds, equities, and commodities are negative.

The second half of a recession (shown on the left) is typically marked by a continued drop in economic activity – in which equities, high yield bonds, and core bonds historically perform well, and commodities decline – before the economy enters “recovery” or expansion stage (middle of chart).

Recessions: What Investors Need to Know (4)

WHAT ASSET CLASSES TEND TO DO WELL IN A RECESSION?

In general, core bonds historically have tended to do well during recessions. Owning core bonds in all stages of the business cycle, and especially during an economic slowdown, may help investors preserve principal while reducing overall portfolio risk, as core bonds are typically less volatile than other asset classes.

Risk assets, such as equities, historically outperform during the second half of a recession and in the expansion phase.

The differences in returns highlight the importance of diversification, a strategy of allocating to various asset classes, which could enable investors to generate gains from some investments and help offset losses from others.

HOW CAN FIXED INCOME INVESTORS BENEFIT FROM ACTIVE MANAGEMENT IN A RECESSION?

The bond market is vast and exceedingly diverse. It includes corporate and high yield bonds, mortgage-backed securities, municipal bonds, emerging market bonds, and more. Each sector or asset class responds differently to economic and market conditions.

Active fixed income managers typically have more flexibility than their passive peers to buy attractive securities and sell those that may underperform. For example, skilled active managers with robust credit research teams have resources to find attractive opportunities, and at the same time manage risks, across the global bond market.

WHAT CAN INVESTORS DO IF THEY ARE WORRIED ABOUT FUTURE RECESSIONS?

Simply put, investors may do well to stay diversified to mitigate potential portfolio volatility – during market and economic downturns. This may also enable portfolios to be well-positioned for a potential market recovery.

Given today’s uncertain economic and geopolitical environment, it may help to look back to how the economy performed following recessionary periods to find reasons for optimism going forward.

Reasons For Optimism

From a historical perspective, it may be good to know that the vibrant U.S. economy has been through many economic cycles (see Exhibit 4), where each downturn or growth slowdown (i.e., the spaces between blue bars, when growth is negative or has slowed significantly) has been followed by a significant recovery (blue bars).

Recessions: What Investors Need to Know (5)

THERE ARE STEPS YOU CAN TAKE TO HELP COUNTER RECESSION CONCERNS

Investors worried about a recession may benefit from taking the following steps to mitigate the potential impact on their portfolios:

  • Avoid behavioral bias when making investment decisions such as selling low during market declines, and buying high during market upturns, which may lead to less than ideal long-term investment outcomes.
  • Stay diversified to potentially mitigate portfolio volatility by allocating across different investments, such as equities, core bonds, credit, and alternatives.
  • Ensure that your investment portfolio remains aligned with your long-term financial goals through regular rebalancing.

In summary, if there’s one important takeaway about recessions, it is that they are part of a vibrant economy. While they can be daunting and unpleasant in the short term, recessions may also present opportunities for patient, long-term investors.

GLOSSARYFootnote5

Basis Point: Equal to 1/100th of 1%.

Bonds: Fixed income investments representing a loan made by an investor to a borrower, such as a government or corporation.

Commodities: Basic goods used in commerce and can be traded with other types of goods. Commodities that can be traded in the public markets include energy, metals, livestock, and agriculture.

Consumer Price Index (CPI): Measures price changes for a representative basket of goods and services paid by consumers over time.

Consumer Spending: The total money spent on final goods and services by individuals and households.

Credit/Debt to GDP: Measures a country’s public debt to its gross domestic product (GDP).

Diversification: The strategy of spreading investments across various asset classes to help reduce portfolio volatility over time.

Dodd-Frank Wall Street Reform and Consumer Protection Act: Created in response to the financial crisis of 2007-2008, and was named after Senators Christopher Dodd and Barney Frank.

Equities: Shares of stock in a company.

Federal Funds Rate: The interest rates in which a depository institution lends funds maintained at the Fed to another depository institution overnight.

Federal Reserve (Fed): The U.S. central bank was created by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary financial system. The Fed’s mandates include full employment and stable prices.Footnote6

Global Financial Crisis (GFC): The financial crisis of 2008, or GFC, marked a sharp decline in worldwide economic activity, triggered by the collapse of the U.S. housing market, which was fueled by low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages.

Gross Domestic Product (GDP): The total market value of the goods and services produced within a country’s borders in a year. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

High Yield Bonds: Debt securities issued by companies that can provide a higher yield than investment-grade bonds, but are considered riskier investments.

Inflation: The increase in the overall price of goods and services in an economy over time.

Investment-Grade Securities: Securities with investment grade ratings that fall within the range of Aaa to Baa3 from credit rating agencies Moody’s, or AAA to BBB-from Standard & Poor’s. A company’s securities have investment grade ratings if it has a strong capacity to meet its financial commitments.

Monetary Policy: A set of tools used by a nation’s central bank to control the overall money supply and promote economic growth. These tools include changing the level of interest rates and bank-reserve requirements.

National Bureau of Economic Research (NBER): A non-profit organization that tracks economic growth and retroactively declares recession periods in the United States.

Treasuries: U.S. Treasury securities issued by the federal government and are considered to be among the safest investments, because all Treasury securities are backed by the “full faith and credit” of the U.S. government.

Volatility: A measure of price fluctuations for securities, derivatives, and market indices.

West Texas Intermediate (WTI): The benchmark crude of the U.S. oil industry.

Yield Curve: A line that plots interest rates, at a set point in time, of bonds having equal credit quality but different maturity.

1 National Bureau of Economic Research “Business Cycle Dating” https://www.nber.org/research/business-cycle-dating#:~:text=The%20NBER's%20definition%20emphasizes%20that,more%20than%20a%20few%20months.Federal Reserve Bank of St. Louis “Is the U.S. in a Recession? What Key Economic Indicators Say” Sept. 26, 2022 https://www.stlouisfed.org/en/on-the-economy/2022/sep/us-recession-what-key-economic-indicators-say Return to content

2 Kiplinger “What is a Recession? 10 Facts You Need to Know” November 22, 2022; Congressional Research Service “Introduction to U.S. Economy: The Business Cycle and Growth” January 3, 2023 Return to content

3 PIMCO and Federal Reserve Economic Data – Federal Reserve Bank of St. Louis; Federal Reserve Bank of St. Louis Economic Research, March 2023 https://research.stlouisfed.org/publications/page1-econ/2023/03/01/all-about-the-business-cycle-where-do-recessions-come-from Return to content

4 Federal Reserve Bank of St. Louis “Shares of gross domestic product: Personal Consumption Expenditures” Q1 2023 https://fred.stlouisfed.org/series/DPCERE1Q156NBEA Return to content

5 (various terms and definitions)GLOSSARYBureau of Economic Analysis, U.S. Department of Commerce https://www.bea.gov/ ; Federal Reserve https://www.federalreserve.gov/faqs.htm; Investopedia https://www.investopedia.com/ ; FINRA https://www.finra.org/investors/learn-to-invest/types-investments/bonds/types-of-bonds/us-treasury-securities; CME Group https://www.cmegroup.com/education/glossary.html#WReturn to content

6 Board of Governors of the Federal Reserve System FAQs “What is the purpose of the Federal Reserve System?” https://www.federalreserve.gov/faqs/about_12594.htm Return to content

Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The Index focuses on the large-cap segment of the U.S. equities market. The Bloomberg U.S. Corporate High-Yield Index the covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes Emerging Markets debt. FRED, short for Federal Reserve Economic Data, is an online database of economic data time series created and maintained by the Research Department at the Federal Reserve Bank of St. Louis. It is not possible to invest directly in an unmanaged index.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO

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Recessions: What Investors Need to Know (2024)

FAQs

What are the best investments during a recession? ›

Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.

How can investors prepare for a recession? ›

Consider thinking about your financial picture in terms of 3 broad categories: preparing for emergencies, protection, and growth potential. These 3 building blocks work together to help make sure you have money for unexpected expenses, a plan to protect what you have, and growth potential to reach your long-term goals.

What happens to investors in a recession? ›

It's normal for stock prices to go down during an economic downturn. The important thing is to hold on to your stocks and wait for the market to recover. Remember that recessions don't last forever. The economy will eventually recover and start growing again.

Where is the safest place to put your money during a recession? ›

Saving Accounts

Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad. Other advantages of savings accounts include: Simple to open and maintain. Deposits are fully insured.

How to build wealth during a recession? ›

5 Things to Invest in When a Recession Hits
  1. Seek Out Core Sector Stocks. During a recession, you might be inclined to give up on stocks, but experts say it's best not to flee equities completely. ...
  2. Focus on Reliable Dividend Stocks. ...
  3. Consider Buying Real Estate. ...
  4. Purchase Precious Metal Investments. ...
  5. “Invest” in Yourself.
Dec 9, 2023

What investments do poorly in a recession? ›

Growth stocks without strong balance sheets and high debt loads are often the most vulnerable to a recession.

Is cash king during a recession? ›

It will give them the funds to buy stocks or other assets during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.

Is it better to have cash or property in a recession? ›

Economic uncertainty: Typically, many people lose their jobs during a recession, and other conditions may cause people's finances to be less than stable as well. Liquidity can be important during a period of economic instability, and having your cash tied up in real estate may not be ideal.

Should I pull my investments before a recession? ›

It may make for some temporary uneasiness, but if you leave your portfolio alone, you'll set yourself up to get through this downturn unscathed. If you sell investments out of panic, you might lock in losses you never quite manage to fully recover from.

Is it smart to invest during a recession? ›

As such, investing during a recession can be a good idea but only under the following circumstances: You have plenty of emergency savings. You should always aim to have enough money in the bank to cover three to six months' of living expenses, with the latter end of that range being more ideal.

Should you hold stocks in a recession? ›

Bottom line. If you're able to increase investments in the stock market during a downturn, it can be a great way to boost your long-term returns and achieve your investment goals.

Do investments lose money in a recession? ›

Key Takeaways. A recession is a significant, widespread and extended decline in economic activity. Riskier assets like stocks and high-yield bonds tend to lose value in a recession, while gold and U.S. Treasuries appreciate.

What is the safest investment if the stock market crashes? ›

Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven.

Is it bad to have money in the bank during a recession? ›

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

What stocks go up during a recession? ›

The Best Recession Stocks of May 2024
  • Merck & Company, Inc. (MRK) Dividend Yield. ...
  • PepsiCo, Inc. (PEP) ...
  • Becton, Dickinson and Company (BDX) Dividend Yield. ...
  • CMS Energy Corporation (CMS) Dividend Yield. ...
  • Xcel Energy Inc. (XEL) ...
  • Ameren Corporation (AEE) Dividend Yield. ...
  • Amgen Inc. (AMGN) ...
  • Thermo Fisher Scientific Inc. (TMO)
May 1, 2024

Do investments do well in a recession? ›

Investing During a Recession

Professional fund managers who understand financial markets and look for good quality investments purchase groups of stocks, bonds or other investments, which helps manage risk. A recession creates an opportunity to buy when prices are lower.

Is it a good idea to invest during a recession? ›

As such, investing during a recession can be a good idea but only under the following circumstances: You have plenty of emergency savings. You should always aim to have enough money in the bank to cover three to six months' of living expenses, with the latter end of that range being more ideal.

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