Considering an Investment in Stocks if a Recession Looms in 2025? Insights from Past Events.
The Federal Reserve Bank of New York frequently evaluates the possibility of a U.S. recession within the next 12 months, using the gap between the 10-year and three-month Treasury rates as a benchmark. Their most recent analysis suggests a roughly 33.6% chance of a recession in the coming year. While this number might not instantly strike terror into many people, it's worth noting that the New York Fed's calculation for a recession wasn't much higher during the late 2007 and early 2008 period – the beginning of what would eventually be known as the Great Recession.
To put this into perspective, a one in three chance of a recession isn't typically common terrain for the New York Fed. So, what does history have to say about investing in the stock market during such uncertain economic times?
The Tangled Web of Economies and Stocks
Initially, this question seems straightforward: bad economy equals bad stock market. The chart below, displaying the percentage decline of the S&P 500 from previous peaks, going back to the early 1950s, bears this out. During economic recessions, the S&P 500 has, without fail, witnessed significant declines. In fact, the index began its downturn before the recession in most cases.
However, the chart also reveals that stocks began recovering before the end of the recession. The plot thickens. Despite this logic, it's crucial to ask: is a recession in 2025 likely at all?
The Million-Dollar Question: Is a Recession Coming in 2025?
Despite the New York Fed's estimate, most economists believe that a recession in 2025 is unlikely. A recent survey of economists by the Securities Industry and Financial Markets Association's Economist Roundtable predicted a deceptively low 1.9% growth in the U.S. GDP (Gross Domestic Product) for the following year. While this growth is lower than for 2024, any positive economic growth signifies no recession.
However, many economists acknowledge that uncertainty abounds. The vast majority of that uncertainty is due to potential policies of the incoming Trump administration. For instance, S&P Global's global chief economist, Paul Gruenwald, admitted in November that the global economic outlook is heavily dependent on the policies' implementation by the new U.S. administration. Policies such as fiscal, trade, and immigration can have significant and uncertain impacts on the economy.
Some economists even believe that Trump's policies could make a recession more likely. John Hopkins University economics professor, Steven Hanke, pointed out in November that the U.S. "probably will experience a recession next year." He warned specifically about the potential impact of Trump's tariffs and trade policies on the economy.
To Buy or Not to Buy: That is the Question
If a recession is imminent in 2025, should investors refrain from purchasing stocks? Not so fast. The main takeaway from history is not that the stock market will always drop in a recession. Instead, a recession provides great opportunities for investors to purchase high-quality stocks at discounted prices.
Patient investors who are willing to wait out the storm can profit from a downturn. The S&P 500 has demonstrated time and time again that it will ultimately climb higher, even during economic downturns. It may be challenging, but it's not impossible to make gains during a recession.
In conclusion, while there's always a chance of a recession and uncertainty surrounding the U.S. economic trajectory, the strong historical performance of the S&P 500 during recessions, and the optimistic consensus among economists for slow growth rather than a recession, suggest that a cautiously optimistic approach can yield benefits for investors in 2025.
Given the current 33.6% probability of a U.S. recession within the next year, as suggested by the Federal Reserve Bank of New York, the question of investing during uncertain economic times arises. Historically, stocks have witnessed significant declines during recessions, with the S&P 500 beginning its downturn before the recession in most cases. Despite this, it's important to consider the possibility that a recession in 2025 might not occur, as many economists predict a deceptively low 1.9% growth in the U.S. GDP.
While the New York Fed's recession probability is worrisome, it's probably too early to make drastic decisions about one's investment portfolio based solely on this figure. The GSPC, or the S&P 500 index, has shown resilience in the past, often recovering before the end of a recession. This suggests that investing during a potential recession might not be as risky as one might initially think.
The probability of a recession and the potential impacts of incoming political policies on the economy are indeed concerning. However, the potential for high-quality stocks to be purchased at discounted prices during a recession might make it an opportune time for patient investors to buy and wait for the market to recover. Therefore, considering the historical performance of the S&P 500 and the optimistic outlook of many economists, a cautiously optimistic approach to investing might be the best strategy in 2025.
