What Is a Recession and Should You Change Your Investments During One

Since 1948, the US has had 12 recessions. Each one felt like the end of the economy to the people living through it. None of them were. The S&P 500 has averaged 20% returns in the 12 months following the end of a recession, and 284% over the 10 years that followed.

The word "recession" triggers panic because most people do not know what it actually means, how long it lasts, or what they should do about it. The financial media makes it worse by treating every economic wobble as a crisis. This post covers what a recession actually is (and is not), how the NBER defines it, what historically happens to investments during recessions, and why changing your strategy is usually the worst thing you can do.

What a Recession Actually Is

The National Bureau of Economic Research (NBER) is the official arbiter of US recession dates. Their definition: a significant decline in economic activity spread across the economy, lasting more than a few months, visible in GDP, income, employment, industrial production, and wholesale-retail sales.

The "two consecutive quarters of negative GDP" rule you hear on TV is media shorthand, not the official definition. The NBER considers three dimensions: depth, diffusion, and duration. A shallow GDP decline across two quarters might not qualify. A deep, broad contraction that lasts only two months might. The COVID recession of 2020 lasted just two months (February to April), yet the NBER classified it as a recession because the decline was so severe and so widespread.

Recessions are declared retroactively. By the time the NBER announces a recession, it has typically been underway for 6 to 12 months. The NBER announced the December 2007 peak in December 2008, a full year later. They announced the February 2020 peak in June 2020, after the recession had already ended.

The average recession since 1945 lasted 10.3 months. The longest was the Great Recession at 18 months (December 2007 to June 2009). The shortest was the COVID recession at 2 months. For more on the technical definition, see our recession glossary term.

A depression is far more severe: a prolonged period of economic contraction with GDP declines of 10% or more and unemployment above 20%. The last US depression was the Great Depression of the 1930s. The US has not experienced one since.

What Happens to the Stock Market During Recessions

The stock market is forward-looking. It typically peaks about 6 months before a recession starts and begins recovering 3 to 6 months before the recession officially ends. This timing mismatch is why investors who react to recession headlines often sell at the bottom and buy at the top.

Here are the median S&P 500 total returns during and after recessions, based on First Trust's analysis of all 12 recessions since 1948:

The data reveals something counterintuitive: the S&P 500 delivered positive median returns during recessions themselves. In 6 of the last 12 recessions, the stock market went up while the economy was officially contracting. The average maximum drawdown around recessions was approximately 30.6% (price-only), but those drawdowns were temporary.

The critical insight: markets rally strongly after the start of a recession. Investors who stayed invested through the 2008 financial crisis, when the S&P 500 fell 57%, earned approximately 400% over the following decade. Missing the 10 best trading days in a decade, which often cluster during the most volatile periods, reduces total returns by roughly half.

For a deeper look at what happens to your portfolio during market crashes, read our guide on what happens when the market crashes.

Should You Change Your Investment Strategy

What the data says

The average 5-year annualized return following the start of an NBER-dated recession is approximately 12.4%, well above the full-sample historical average of about 10.2%. Recessions, despite feeling catastrophic, have historically been followed by above-average returns.

Investors who stayed invested through the 2008 financial crisis earned approximately 400% over the following decade. Investors who sold and moved to cash earned near-zero. The difference between those two outcomes, on a $100,000 portfolio, is roughly $400,000 over 10 years.

What "doing nothing" actually means

Doing nothing does not mean being passive. It means being mechanical rather than emotional:

• Keep your automatic investments running. Do not pause them. Dollar-cost averaging through a recession means buying shares at their lowest prices in years.
• Do not sell stocks to move to cash. The bottom is only identifiable in retrospect. By the time you feel comfortable buying back in, the market has usually already recovered.
• Do rebalance your portfolio if your allocation has drifted significantly. This is mechanical, not emotional. If your target is 80/20 stocks/bonds and the market drop pushed you to 70/30, sell bonds to buy stocks. You are buying low automatically.
• Do review your emergency fund. You should have 3 to 6 months of expenses saved before a recession, not during one.

When you should actually do something

• If you are near retirement (within 5 years): ensure your next 3 to 5 years of spending are in cash or short-term bonds, not stocks. A recession early in retirement can permanently damage your portfolio if you are forced to sell depressed stocks to fund withdrawals.
• If you lose your job: reduce spending immediately, but do not sell investments unless absolutely necessary. Your investments are your long-term wealth. Your emergency fund is your short-term buffer.
• If you have excess cash: consider deploying it in tranches over 3 to 6 months rather than all at once. You cannot time the bottom, but you can ensure you are buying at reasonably low prices across a range of dates.

The 2026 Recession Question

As of mid-2026, recession probability models tell a nuanced story. The New York Fed's yield-curve model puts the probability of a US recession by April 2027 at approximately 16%, down from peaks above 70% in 2023. The model uses the spread between the 10-year Treasury yield and the 3-month Treasury bill rate to estimate recession probability 12 months ahead.

Goldman Sachs Research projects US GDP to expand 2.5% in 2026 (Q4 year over year), above the consensus estimate of 2.1%. Goldman reduced their recession probability from 30% to 20% in their January 2026 outlook, citing tax cuts and reduced tariff drag as growth drivers.

The BEA's third estimate for Q1 2026 showed real GDP growing at 2.1% annualized, up from just 0.5% in Q4 2025. The Q4 slowdown was partly driven by a government shutdown that depressed federal spending. The Q1 rebound suggests the underlying economy remains resilient.

Key risks to watch: inflation running at approximately 3.3% (above the Fed's 2% target), potential Fed rate hikes in late 2026, energy price volatility from escalating Middle East tensions, and the possibility that AI-driven stock valuations are overextended. The 10-year Treasury yield climbed to 4.71% in July 2026, its highest level since January 2025.

The takeaway: a recession is a real risk but not a given. The best response is preparedness, not prediction. For a deeper dive into recession investing strategy, see our guide on how to invest during a recession.

Real-World Examples

Example 1: The seller who locked in losses

In March 2009, an investor saw their $100,000 portfolio down to $50,000 from the peak. The S&P 500 had fallen 57%. Every day brought more bad news: bank failures, rising unemployment, collapsing housing prices. The fear was visceral. They sold everything and moved to cash, telling themselves they would "buy back when things calm down."

The S&P 500 proceeded to return approximately 400% over the next decade. Their $50,000 in cash earned near-zero interest. By 2019, that same $50,000, if left invested, would have grown to approximately $250,000. By waiting for things to "calm down," they locked in a permanent $200,000 loss. The market calmed down long before the headlines did.

Example 2: The buyer who kept contributing

In February 2020, an investor with a $200,000 portfolio and automatic $2,000 monthly contributions watched the market drop 34% in 33 days. Their portfolio fell to approximately $132,000. The temptation to stop the automatic investments was overwhelming. "Why keep throwing money into a falling market?"

They kept the automatic investments running. In March and April 2020, their $2,000 monthly contributions bought shares at the lowest prices in years. By August 2020, the S&P 500 had fully recovered. By December 2021, it was up 70% from the March 2020 low. Their portfolio not only recovered but exceeded its pre-crash value, and the shares they bought during the dip accelerated their recovery significantly.

The difference between these two investors was not intelligence, timing, or luck. It was behavior. One reacted to fear. The other stuck to a plan. For more on the psychology behind this, read our post on how fear of investing keeps people poor.

Common Mistakes

Selling stocks during a recession to "stop the bleeding." This locks in losses and guarantees you miss the recovery. The market begins recovering before the recession officially ends, so by the time you feel safe re-entering, prices are already higher.

Pausing automatic investments during a downturn. This is the worst possible time to stop. You are opting out of buying at discounted prices. The entire point of dollar-cost averaging is that it works automatically, including during downturns.

Waiting for the "all clear" before re-entering the market. The recovery happens before the recession officially ends. The NBER declared the COVID recession over in July 2020, but the market had already recovered by August. If you waited for the official announcement, you missed the entire rebound.

Treating every economic slowdown as a depression. Recessions are normal and brief (average 10 months). Depressions are catastrophic and rare. Confusing the two leads to massively overreacting.

Moving everything to gold or cash "just in case." Cash loses purchasing power to inflation every year. Gold pays no dividends and its price is driven by speculation as much as inflation. Both guarantee a loss of purchasing power over time.

Conclusion

Recessions are normal, brief (averaging 10 months since 1945), and historically followed by strong market recoveries. The median S&P 500 return in the year after a recession ends is 20%. Over 10 years, it is 284%. The best strategy during a recession is usually the same as before one: stay invested, keep contributing, rebalance mechanically.

The investors who lose the most during recessions are the ones who change their strategy. The ones who gain the most are the ones who keep buying.

If recession headlines are making you nervous, read our guide on what happens when the market crashes. Then check that your automatic investments are still running.

This post is for informational purposes only and does not constitute financial advice. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results.