07-05-2025
Buy stocks just when a recession is confirmed? Here's why the risk can pay off.
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A rare contrarian stock-market buy signal with an impressive record may soon be triggered. I'm referring to the so-called 'Recession Buy Indicator,' according to which you should invest in the U.S. stock market when it's announced that a recession has begun.
Based on the average lag time between when a U.S. recession starts and when it's confirmed by the National Bureau of Economic Research, such an announcement could come by this summer. (The NBER is the semiofficial arbiter of when U.S. recessions begin and end.) The NBER defines a recession as 'a significant decline in economic activity that … lasts more than a few months.'
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It's timely to review the Recession Buy Indicator after the report that the U.S. economy shrank at an annualized rate of 0.3% in the first quarter of this year. Many economists believe that President Donald Trump's tariffs could cause the economy to shrink even further.
Read: The economy has shrunk. Follow these 10 money rules for 2025 to keep your wealth from shrinking with it.
The average lag time for the NBER to announce that a recession has begun is 6.8 months, based on announcement dates since 1980. (I was unable to ascertain announcement dates for recessions before then.) But there was a wide range on either side of this average, from as short as three months to as long as 11 months.
It pays to be acquainted with the track record of the Recession Buy Indicator (RBI), since it triggers at the same time that you are likely to be most despondent — the moment a recession is officially announced. The accompanying chart shows the indicator's track record for all recessions in the NBER calendar, which dates back to 1857.
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Since I don't have announcement dates for pre-1980 recessions, I assumed the announcements occurred 6.8 months after they began. The chart reflects the performance of the stock market in inflation-adjusted and dividend-adjusted terms, courtesy of the database maintained by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University in California.
Notice that the RBI's performance over the three months after triggering is no different than average. Though that might be disappointing, it's actually quite impressive. It means that, over the three months after the NBER says the U.S. is in a recession, the stock market performs no worse than average — far better, in other words, than what most investors would expect. And over the six- and 12-month period following an RBI buy signal, the stock market performs better than average.
