When Recessions Hit

A recession is in progress when we have two or more consecutive quarters of shrinking gross domestic product (GDP) growth. Occasional economic downturns — recessions — are inevitable. On average, they happen about every five years, which makes us overdue for one now. They can cause financial distress, but they’re not all bad. Here’s what to expect when one occurs:

• Stocks will fall in value, often by 20% to 30%, but sometimes by as much as 50%. The market has always eventually recovered from recessions — sometimes within one year, but usually within a few.

• Interest rates, including those for credit cards, often fall. That’s good news for those borrowing to buy a home or car, or refinancing their debt.

• Many bond prices rise. This is generally true for the safest bonds — Treasuries — and to a lesser degree for high-quality corporate bonds. Junk bonds aren’t likely to fare well, though.

• Home prices hold steady or even rise during most recessions.

• Inflation often pulls back, effectively lowering prices, since many expenses fall. That can make a recession a good time to make a large purchase, such as a new car or a major appliance.

• Unemployment tends to rise. During the Great Recession of 2007 to 2009, unemployment nearly doubled, from 5% to 9.5%.

No two recessions will be exactly alike, but history suggests that there are often silver linings amid the disruption. You can brace for a recession by having a well-stocked emergency fund that can cover all important expenses for six to nine months. It can also be smart to have some healthy dividend-paying stocks in your portfolio, as they will likely keep kicking out income in good times and bad.

Most importantly, simply expect occasional economic downturns, and don’t panic. If you can have some extra cash on hand, recessions can be great times to buy stocks.