Market outlook

What can we learn from recent recessions?

A photographer working alone in a grassy field at sunset contemplates his surroundings and the current state of the market.

It’s been a rough year for investors across the board. Over the course of 2022, short-term interest rates have risen at a record-breaking pace — from near zero to over 4.0%. These moves were orchestrated by the U.S. Federal Reserve (the “Fed”) in response to the rapid rise of inflation, now at levels not seen since the 1980s. The Fed’s rationale is that this form of monetary tightening will slow down the U.S. economy, and in doing so, will fight historically high inflation levels. 

These rate hikes have roiled equity markets, underscoring the strong link between stock market valuations and interest rates. Growth stocks, like those that dominate the Nasdaq-100 index, have been particularly hard hit, because rising rates tend to discount the expectations for a company’s future growth prospects. This discount is reflected in share prices, more so for growth stocks than their value-stock counterparts.1

How high will interest rates go? 

That’s hard to say, because each rate hike is data-dependent on trends of economic growth, inflation, and employment. The Fed also considers the inherent lag for past rate hikes to filter through the economy, along with the magnitude of those cumulative increases. Rate hikes in 2022 totaled 4.25%, and further increases are likely, given the Fed’s commitment to bring down inflation.

Is a recession on the horizon? 

Despite predictions that the Fed’s actions could trigger a recession, it’s unclear if that scenario will occur. Higher interest rates have certainly forced slowdowns in some parts of economy, particularly in housing sales. Still, labor markets have remained robust and economic growth has rebounded. The Fed’s announcement that it intends to decrease the pace and scale of interest rate hikes also means that a recession is not necessarily inevitable.     

So, where are we now? A common rule of thumb defines a recession as two consecutive quarters of negative real gross domestic product (GDP), calculated on a year-over-year basis. Using this measure, the economy was in technical recession during the first two quarters of the year.2 However, growth managed to recover in the third quarter at a 2.9% annualized rate, according to the Bureau of Economic Analysis (BEA). It’s important to remember that GDP numbers are backward-looking and often revised, so we may be in a recession before we even realize it.

Are there lessons to be learned from previous economic downturns? 

The past two recessions — the Global Financial Crisis of 2008 and the pandemic-driven recession of 2020 — have the unique distinction of being history’s longest, followed by the shortest, economic recession since the Great Depression that began in the 1920s.3 But these two downturns have very different origins:

  • December 2007–June 2009: The Global Financial Crisis, which lasted 18 months, was triggered by the U.S. subprime mortgage crisis, leading to the collapse of the U.S. housing market. A deep global recession ensued, with unemployment spiking to double digits. In response, central banks worldwide undertook unprecedented measures of quantitative easing, lowering interest rates to near-zero levels.

  • March 2020–April 2020: The pandemic-driven recession of 2020 also led to high levels of unemployment and the shutdown of many businesses worldwide. But this downturn lasted barely two months, largely due to aggressive central bank measures to reduce interest rates and inject further liquidity into the system.

Notably, growth stocks behaved very differently in these periods, as measured by the Nasdaq-100. This index declined significantly during the Global Financial Crisis as the demand for goods and services plunged, but it managed to rise over the course of the 2020 recession, largely due to a heightened dependence on technology and communications amid pandemic-related shutdowns.4

It’s different each time

Unlike the conditions that preceded the past two recessions, today’s labor market is extremely tight, and commodity prices have increased amid heightened geopolitical risks (though prices have eased from their highest levels). The economy is also contending with the overhangs of near-zero interest rates and the extreme liquidity measures that eased the past two recessions. In many ways, these factors lie at the roots of today’s interest-rate and inflation woes. 

It's likely that we’ll need to see progress on these fronts before growth sectors can meaningfully regain lost ground. But this will take time, along with some patience for growth-stock investors. The key for these investors is to stay focused on the long term, for the reasons highlighted below.

Three takeaways for growth stock investors:
  • Focus on long-term innovation — If you’re invested in high-growth sectors — such as technology, biotechnology and communications — it’s important to remember why you chose these sectors in the first place. Their disruptive and enduring mega trends of innovation should be considered as part of a diversified portfolio, regardless of where we are in the business or economic cycle.
  • Don’t panic — Usually, selling shares into the type of bear market we’re seeing today doesn’t make sense, unless there is an immediate need for liquidity. Depending on your risk tolerance, you may want to consider adding to growth-stock positions. Such “dollar-cost averaging” can be an effective strategy for long-term investors because shares would be added at lower points of entry — and at lower valuations
  • Don’t try to time the market — The stock market is a forward-looking, discounting mechanism. If history is any guide, equities may very well anticipate a shift in sentiment, rotating from today’s focus on inflation toward higher growth expectations. But history also shows that few investors are successful at timing the market. This reality underscores the need to take a long-term approach to growth-stock investing. 


  • 1

    Source: Corporate Finance Institute

  • 2

    Source: Bureau of Economic Analysis

  • 3

    Source: National Bureau of Economic Research

  • 4

    Source: Nasdaq

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