Recession concerns have been a fixture in the news lately, prompting many investors to wonder about what factors go into a recession announcement and how an economic downturn would impact their portfolios.
Recessions may understandably trigger worries over how markets might perform. However, investors should be aware that recession announcements are backward-looking, in contrast to the forward-looking nature of markets. Recessions are typically determined using macroeconomic indicators such as employment rates, consumption and income data, and gross domestic product growth—information that is rapidly incorporated into market prices. In fact, recessions are often officially declared after the market is already on the path to recovery.
Consistent with forward-looking expectations, average US equity returns have been positive after the onset of a recession, as seen in Exhibit 1 chart below.
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