What to Consider When Investing in Stocks During a Recession

Recessions can be a difficult time for investors, as stock prices tend to plummet. Markets can be volatile and stock prices fluctuate sharply. A sharp decline in the stock market is usually an indicator of an impending recession, that is, a temporary period of economic decline. With the S&P 500 index falling by 1000 points, or about a fifth, from January to June, a consensus is emerging that a recession is coming, perhaps next year.

When looking for stocks or ETFs to invest in during a recession, it's important to keep in mind that performance shouldn't be the main determining factor, as higher returns tend to carry additional risk. Consider stocks like Merck (MRK (opens in new tab)), the pharmaceutical giant, which has a price-benefit ratio, based on estimated earnings for next year, of 13 and yields 3.0%. To find stocks that performed better this year, define the price and performance filter in your stock evaluator to show any value higher than the performance of last year's S&P 500. Investing in funds allows you to be exposed to specific baskets of stock, rather than to a single investment (such as an individual stock).

Despite continuing uncertainty in the markets, there is no imminent recession thanks to strong GDP growth and earnings, as well as the moderation in inflation at the end of the year. But the anticipation of pain is often worse than the reality, and the stock market expects someone to simply take off the band-aid and declare a recession now. When investing during a recession, it's important to do your research and understand the risks associated with each investment. It's also important to remember that recessions are temporary and that markets will eventually recover.

To get an idea of how long it may take for markets to recover from a recession, look at past recessions. Of these, the average decline in the stock market was 34%, while severe recessions, such as those of 1973 and 2001, produced an average decline of around 43%. And since the index has existed for 65 years, it gives us a way to see the performance of the stock market in most of the recessions following World War II.