Because recessions are marked by prolonged declines in economic activity, they are bad news for stocks.
Depending on how broad the recession is and how long it lasts, stocks will generally show declines.
However, even in recessions, some companies and their stocks do well. Picking which stocks will avoid the slump is not easy.
Recession OfficialRecessions are officially defined by an obscure group of private economists called the National Board of Economic Review.
This group of economists examines a number of key statistics (unemployment is one) and officially set the date when a recession begins.
Many of the economic indicators the economists survey take months to report, so the official start date is always some months in the past.
For many businesses and consumers, the pronouncement of the official start of a recession has little meaning. They know well before that the economy is slowing.
What Should Stock Investors Do?What should stock investors do during a recession?
Assuming you don’t lose your job, investors have some choices.
If you are younger than 55 and believe the economy will come back, there are some great buying opportunities when the economy drags down stock prices.
You must have a high tolerance for volatility and not be concerned if stocks drop lower than when you buy in.
With a long time frame (five years or more), history says you have a chance to score some impressive returns.
If you are at or approaching retirement, your choices are more difficult.
You can cash out, but doing so almost guarantees a loss of some magnitude.
Thanks to longer life spans, you will need the growth potential of stocks to keep your nest egg generating income for many years to come.
There are no simple or easy answers. Risk and volatility are issues that accompany recession for the stock market.
Not the best of choices.