Debunking the Myth: Don’t Panic-Sell When a Recession Is Predicted

People have been predicting a recession for quite some time now. Though it hasn’t come to pass, fear about the economy has led many people to believe they should “play it safe” and cash out of the stock market before things get bad.

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The Market Always Bounces Back Some of It Is Just Hype Focus on Time in the Market Rather Than Timing the Market It’s Better To Be in the Market When Recessions Occur

But trying to time the market almost never works. Even the wealthiest investors can’t consistently predict the best moments to sell and reenter the market. Those who try to chase market highs don’t always succeed, just as those who bail when things look dicey often come to regret it.

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If you want to succeed as a stock market investor, you shouldn’t panic-sell when a recession is predicted. Based on historical evidence and expert advice, long-term investing through the ups and downs beats trying to hop in and out around an economic downturn.

Also see how to prepare for a recession.

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The Market Always Bounces Back

Making decisions — especially financial ones — based on stress or fear rarely works out. It’s better to leave emotions out of it. When it comes to the stock market, it might also help to see its trajectory over decades.

Take the Dow, a stock market index of 30 major companies on the public stock exchange. Over the past 100 years, it’s experienced an overall upward movement. It has dipped at key points in history — like in the 1930s and around 2009 — but it’s always bounced back.

The S&P 500 has seen an average annualized return of 10.33% per year. Even with market downturns, those who stay invested for the long term tend to see their investments rise beyond the dips.

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Some of It Is Just Hype

Social media posts and news articles that predict a recession and significant market downturns tend to garner a lot of hype. But just because someone’s predicting something doesn’t make it true. Predictions also change all the time.

“Many have forgotten, but in late 2022 Bloomberg Economists were forecasting a 100% chance of recession over the following 12 months,” said Adam Recker, senior managing director and head of equities at The Mather Group. “In 2023, the S&P 500 ended up over 26%. This is only one example, but it should tell investors a lot about the risk of taking these predictions seriously.”

So panic-selling doesn’t necessarily mean you’re protecting your investments. And if you sell when the market’s down, chances are you’ll miss the bounce-back. You might not even invest again — depending on how much you let your emotions dictate your decision-making.

“Knowing which signal to follow is impossible since these [recession] probabilities are changing all of the time and probabilities don’t actually lead to a recession. They are just predictions,” said Jamie Ebersole, CFA, CFP, founder and CEO of Ebersole Financial. “In this scenario, you would be getting out of the market all of the time, and I can only guess not getting back in since there would still be the chance of a recession in the future.”

Focus on Time in the Market Rather Than Timing the Market

Many experts subscribe to the idea of “time in the market” rather than trying to “time the market.” If you’re worried about a recession, take a look at your long-term strategy. A few adjustments might help you weather the storm, but panicking likely won’t.

“We believe it is better to stay the course, and if anything, go on the offensive to proactively pursue value-add strategies both in the tax and investment realms,” Recker said. “When pulling out of the market, you are assuming that a recession or market decline forecast is accurate, and that you will know the right time to re-enter the market.”

It’s Better To Be in the Market When Recessions Occur

This might sound counterintuitive, but some experts believe it’s better to be in the market — rather than pull out — when a recession occurs.

“Trying to guess the market leads to gridlock and fundamentally means being out of the market. History has shown us that to benefit from the recovery after a recession and enjoy the benefits of the normal growth in the stock markets, you need to be in the markets when the recessions occur,” Ebersole said.

Of course, you can diversify your portfolio to help get you through the downturn.

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