What Will a Recession Mean for ETFs?

It seems pretty clear that speculating about a U.S. recession is pretty painful for exchange-traded investors but what about when we get there?

Stock markets, as we learned back in Economics 101, are forward - looking mechanisms and seem to always be one step ahead of our emotions. This is what makes investing so difficult.

Because of various failures and missteps by regulators and central banks, global stock markets are currently serving a clearing mechanisms with painful consequences. But a point will be reached when fresh money, from the $3.3 trillion sitting on the sidelines in money market funds, will move into the market. The problem is that it may take a while and ETF prices may have to drop sharply.

But the record of stockmarkets during a recession is quite mixed and sometime counterintuitively quite good. In the nine U.S recessions (zero to negative growth) since World War II, in four of those recessions the stock market actually soared: 40% in 1954, 22% in 1961, 30% in 1980, and 30% in 1991.