These are familiar responses to recessions. I remember the stock market reaction to the recessions of 1990-91 and 2000-02 and was confused at the time. I came to learn valuable lessons that could help us going forward.
In 1990, I was 13, and I started investing with summer job money. George Bush, the 41st President, was in office and the economy was in a recession. The S&P 500 went down 6.56% for all of 1990. Unemployment started going up in 1989 and peaked in 1992.
Businesses started to cut costs, jobs, and became more efficient and the stock market rewarded them for the changes they made. Starting in November of 1990 the stock market had 7 straight months of positive returns. I remember wondering why the stock market was going up in the face of all the bad news. I learned that stocks are forward looking and investors knew that the actions companies were taking in the present will bring profits in the near future.
The S&P 500 gave investors positive returns from 1991 to 1999. If you left the market at the bottom in October of 1990 after losing 16.25% you really messed up. The S&P 500 went up 383% from November 1990 through December 1999.
After years of expansion in the 90's, the U.S. economy suffered another recession in 2000-2002. The recession started while Bill Clinton was in office and followed George W. Bush into office. The events of 9/11 created further instability in the economy and made it last longer.
Once again, businesses made tough decisions. They cut costs, laid off workers, and became more efficient. Unemployment peaked in the last half of 2003. The low in the S&P 500 came in February 2003 at 841.15, down 43.87% from December 31st, 1999. In March of 2003, the market turned around and had 5 years of positive returns. From the bottom in February 2003 to December 2007, the S&P 500 grew 74.57%.
Companies are now cutting costs, laying off workers, and becoming more efficient. No one nows when the market will turn around, maybe it already has. If you are not buying more stocks now or you are completely out of stocks, you will not participate in the the gains to come in the future. This is a mistake that can be avoided by looking back at the past and learning from history.