The future is not as bleak as it may seem now.
The stock market has performed well in recent years, with many investors seeing their portfolios soar: The S&P 500 (^GSPC 1.11% ) is up more than 52% since bottoming in October 2022, while the tech-heavy Nasdaq (^IXIC 1.03% ) has surged nearly 67% over the same period.
But these rallies won’t last forever, and many experts are predicting what the next market downturn will look like. Economist Harry Dent said in a recent interview with Fox Business that the market is currently in a “bubble within a bubble.” Research firm Capital Economics also predicts that the S&P 500 could face a correction after reaching the 6,500 mark, and analysts expect that could happen by the end of 2025.
Many have likened this market surge, fueled in large part by hopes for artificial intelligence (AI) technology, to the dot-com bubble of the early 2000s. That decline ultimately became the longest-running bear market in the history of the S&P 500, and investors are right to be nervous about a similar downturn in the near future.
But what does this actually mean for your investments? While every recession and bubble is different, here’s what history has to say about these periods, and how to maximise your long-term returns amid market uncertainty.
What history tells us about market downturns
There’s good news and not-so-good news about the future of the stock market. The not-so-good news is that it’s impossible to predict exactly what the market will do. Experts may make wild claims about when the next recession will start or how severe it will be, but no one can say for sure what will happen.
All this uncertainty can be daunting, especially if you’re trying to figure out what to do with your investments. But the good news is, history shows that markets are surprisingly predictable over the long term.
The stock market has a 100% success rate when it comes to recovering from recessions, which is quite a remarkable track record since nothing is guaranteed in investing.
In the past 25 years alone, the market has seen some of the worst downturns in history, including a record-breaking bear market after the dot-com bubble burst, the Great Recession of 2008, the COVID-19 crash of 2020, and the most recent recession through 2022. Yet, despite all of this, the S&P 500 has risen by more than 269% since 2000.
^SPX data from YCharts.
If history has taught us anything about recessions, no matter how severe, they are always temporary. Rather than trying to predict when the next recession will come or how long it will last, it is often better to simply weather the storm and wait for the inevitable recovery.
How to invest now
In uncertain times, it’s natural to want to be active with your portfolio, and many investors may be eager to time the market, buying and selling stocks depending on when the next correction will begin.
While this may sound clever in theory, it’s nearly impossible to implement in practice: markets are highly unpredictable in the short term, and you run the risk of buying or selling at the wrong time and suffering costly losses.
For example, over the past few years, countless economic forecasters have predicted that the United States would fall into a recession. So far, that hasn’t happened. But since 2021 alone, the S&P 500 has soared by more than 44%. If you stopped investing because of fears of a recession, you would have missed out on a huge surge in the stock market.
^SPX data from YCharts.
Whatever the market holds in the short term, its long-term potential is outstanding. To minimize risk and maximize returns, it is wise to stay in the market for as long as possible, even during tough times.
But the key is to make sure you’re investing in the right places: If your portfolio is filled with healthy stocks in solid companies, you’re much more likely to recover from a correction and achieve long-term growth.
If you haven’t done so already, now is a great time to take a hard look at your investments and double-check that each stock is a good fit for your portfolio. If all of your stocks are in companies with strong fundamentals, they are much more likely to survive a serious market downturn.
No one knows what the short-term future holds for the stock market, but history teaches us that its long-term potential is incredibly promising. If you invest in the right places and maintain a long-term perspective, what happens in the next few days, weeks, and months won’t matter as much.
