Navigating the stock market during an economic downturn can feel like walking through a fog: opportunities abound, but so do risks. A burning question for investors is whether recessions or downturns lead to a spike in undervalued stocks—and if so, why. In this article, I’ll walk you through real experiences and market data, mix in some expert insights, and even touch on international differences in how “verified trade” is treated (just to add a twist and highlight how standards sometimes shape financial markets). So, if you’re trying to figure out if now is a good time to hunt for bargains, or just want to understand how broader economic forces shape valuations, you’ll get some actionable answers here.
Let’s get one thing straight: when the economy hits a rough patch, stock prices often fall—but not always in a way that matches the actual, long-term value of the underlying businesses. This disconnect is where undervalued stocks come into play. According to a 2014 study from SSRN, broad-based selloffs during downturns frequently push fundamentally strong companies below their intrinsic value, creating a “clearance sale” environment for savvy investors.
I remember during the early days of the COVID-19 pandemic, watching blue-chip stocks like Disney and JPMorgan Chase drop over 30% in a matter of weeks. Did their long-term prospects suddenly evaporate? Hardly. But fear and forced selling (margin calls, anyone?) drove prices down across the board. For anyone with cash and courage, it was a chance to scoop up quality companies at a discount.
Here’s a funny story: In 2009, I convinced my skeptical uncle to buy shares of Ford when they dipped below $2. He thought the company was done for, but their balance sheet suggested they could ride out the storm. Three years later, he’d quadrupled his money. (I still get free dinners from that advice!)
To give this discussion some professional heft, I reached out to two contacts from my CFA study group. Here’s how they see it:
“In down markets, correlation goes to one—everything gets sold, good or bad. That’s when our value screens light up. The trick is separating the babies from the bathwater.”
— Sara Collins, CFA, Portfolio Manager
“Valuation models are imperfect, but during recessions, the market’s emotional selling often creates more mispricings. It’s uncomfortable to buy when everyone else is panicking, but that’s usually the best time.”
— Michael Tan, Equity Analyst
Their comments echo what I’ve seen: downturns increase the number of stocks trading below their intrinsic value, but picking the right ones still takes diligence.
Let’s get a bit quantitative. According to Morningstar research, the median price-to-earnings (P/E) ratio for the S&P 500 dropped from 23 to 14 during the 2008 crisis, and from 22 to 15 in 2020. That’s a 30-40% haircut in valuations, on average. But if you screened for stocks with low debt and high cash flow, you would’ve found dozens of companies trading at multi-decade lows.
Of course, not every cheap stock is a bargain—sometimes, the business is in real trouble (hello, Blockbuster in 2009). But downturns expand the opportunity set for value investors who know how to separate the wheat from the chaff.
When markets tumble, here’s how I usually approach it:
I’ll be honest: I’ve made mistakes. In March 2020, I bought Macy’s, thinking it was unfairly beaten down. Turns out, their debt load was way worse than I realized. Lesson learned: cheap isn’t always good value.
You might wonder—what do trade verification standards have to do with undervalued stocks? More than you’d think. In some countries, strict trade documentation (think “verified trade” under WTO or OECD rules) affects supply chains, which in turn impacts listed companies’ cash flows and valuations during downturns. If a country’s standards make it harder for firms to certify exports, those firms might face extra costs or delays—making them look riskier to investors.
| Country/Org | Standard Name | Legal Basis | Enforcement Agency |
|---|---|---|---|
| USA | Verified Export Compliance | USTR, Export Administration Regulations (EAR) | U.S. Department of Commerce |
| EU | Authorized Economic Operator (AEO) | EU Customs Code | National Customs Agencies |
| China | Advanced Certified Enterprise | General Administration of Customs Order No. 237 | China Customs |
| OECD | Due Diligence Guidance | OECD Due Diligence Guidance for Responsible Supply Chains | OECD Secretariat |
For example, during the 2022-2023 global supply chain crunch, I watched as a mid-cap Asian electronics manufacturer saw its share price tumble—not because demand dried up, but because stricter EU import verifications delayed shipments by weeks. Investors dumped the stock, making it look undervalued. But a closer read of the WTO’s Trade Facilitation Agreement standards showed this was a temporary hiccup. Six months later, the company’s share price had rebounded.
Suppose Country A (with loose trade verification) and Country B (with strict standards) both export steel. During a global downturn, steel prices collapse, and both countries’ steel companies get hammered on their stock markets.
An industry analyst on a recent FT roundtable summed it up: “Trade certification bottlenecks create real market distortions. Sometimes, stocks are cheap for a reason—but sometimes, it’s just bureaucracy.”
In a nutshell, economic downturns do typically increase the number of undervalued stocks, but not all that glitters is gold. My biggest takeaway, after two decades in the trenches: use screens and data, but always dig into the why behind a price drop. Sometimes, it’s a fleeting panic—other times, it’s a sign of permanent trouble. And don’t ignore international quirks like trade verification—they can create hidden risks and opportunities.
For your next steps, I’d suggest:
If you want to get better at this, start a crash log of your own market mistakes. I guarantee you’ll learn more from your blunders than your wins. And if you ever need a sanity check, hit me up—I’ve probably messed it up worse.