Are market dips always a good buy?

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below. All data referenced in this article is sourced from LSEG Datastream unless otherwise stated, and is accurate at the time of publishing.

The S&P 500 started the year strong – until it didn’t. In February, the index tumbled 10% in just three weeks. Now, with US President Donald Trump’s so-called ‘Liberation Day’ ushering in a wave of tariffs, investors are bracing for its ripple effects – alongside his push to dismantle Biden-era policies on taxation and regulation.

The outlook for financial markets and the global economy might be highly uncertain, but some experts are saying this could be a good time to ‘buy the dip’.

A buying opportunity?

But history urges caution. Over the past 60 years, when US equities have fallen 10% at any given point, the average return over the next year has been just 6% (below the long-term 9% average). And when a recession has followed – which has happened roughly about a third of the time – markets have typically fallen another 14%, making the initial dip a painful trap for buyers. 

On the other hand, when there’s no recession, returns tend to be much higher – around 16%. This shows why context matters: not every market drop is a great buying opportunity, and understanding the overall economy is crucial when weighing the risks and potential gains.

Could the US be heading for a recession?

It’s a tricky time for the American economy. The US has stepped up its trade restrictions – introducing sweeping new tariffs, including a 10% baseline rate for most countries and higher “reciprocal” tariffs for 60 targeted nations.

These policies might be mere bargaining tools, but they could also lead to higher prices and slower economic growth. And since the policies keep changing, it’s hard to know the full impact just yet. 

Although most economists do not forecast a major downturn, recession risks have clearly risen and we can’t exclude to see US GDP contract for a couple of quarters, which would match the technical definition of a recession.

Are all recessions made equal?

Markets care about more than just a recession – they care about how severe it might be. Stocks typically tend to fall before a recession is official and recover before it ends.

Once a recession kicks in, US stocks have historically gained just 2% over the next year – far below the usual 9% return. But not all downturns are equal: in 2008, following the global financial crisis, equities plunged 34%, while the sharp-but-brief COVID-induced recession of 2020 saw a 29% rebound. 

It’s a good reminder that recessions don’t always play out the same way.

How US stocks have performed after past recessions

S&P 500 returns one year before and after each US recession (since 1945), indexed to 100 at the start of each recession – highlight the significant differences in market performance.

Big recessions tend to have a bigger impact on markets

History teaches us that the most severe stock market declines happen when real GDP drops sharply. Looking at the 12 months after each recession:

• In 2008, the S&P 500 dropped 34% as GDP fell by 3.2%
• In 1973, stocks were down 27% with GDP dipping by 1.9%
• In 1981, there was an 18% drop with GDP contracting by 2.6%.

This (and the following chart) reinforces an important point: that not all recessions are the same. And for investors, knowing the difference between a mild slowdown and a severe one is important when considering how the market may behave.

The size of a recession matters for markets 

S&P 500 returns in the 12 months following the start of a US recession compared to changes in US GDP during the same period (since 1945). 

What it all means for investors

In such an uncertain environment, caution is needed. Visibility is low and market sentiment dismal, making any attempts to time the market more challenging than ever. Instead, investors may be wise to keep calm, sit tight and avoid any knee-jerk decisions until more clarity emerges.

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