If I put my money in investment X, what will I be paid at some point in the future, and what’s the risk that investment X won’t deliver that future return?

Those are the questions investors ask themselves, assuming that one of the most important tenets of investment markets is true—that they’re huge discounting mechanisms. To determine the present value of future earnings, the promised future payment is “discounted” back over a period of time. The higher the discount rate, the more risk an investor takes on, resulting in the lower price of a security in the present. These discounted cash flows govern the value of stocks, bonds, dividends—and just about any investment that promises some payment in the future.

Which brings us to the idea of a recession. There’s an old saying on Wall Street that the stock market has predicted nine of the last five recessions. The point is, Wall Street tends to anticipate downturns in the economy by assigning a higher discount rate to the value of securities, thus lowering their current value.

In light of this phenomenon—discounting the future—how do markets do during the actual recession? The short answer: not bad.

Most of the time, we don’t know that we’re in a recession until after it happens. We even have a formal organization—the Business Cycle Dating Committee of the National Bureau of Economic Research in Cambridge, Massachusetts—that acts as the official chronicler of the business cycle. If the committee records “significant decline in economic activity spread across the economy, lasting more than a few months”—something it gauges by looking mostly at gross domestic product, but also at measures such as personal income, employment, industrial production, and sales in the manufacturing and wholesale-retail sectors—then the economy is thought to be in recession. As of this writing in February, the committee hasn’t stated that we’re in a recession now, but it’s generally believed that we are. Sometimes it can take six months or more for the committee to come to a conclusion as it continues to gather data.

Since 1950, recessions have typically lasted 10 months. The shortest lasted six months, and the longest lasted for 16. But here’s the interesting part. In an excellent commentary in his blog The Investment Scientist, Michael Zhuang, founder and chief investment scientist of MZ Capital Management, LLC, an investment advisory firm in Washington, D.C., writes, “In five of the last nine recessions, the Standard & Poor’s 500 Index actually increased [returns] during the downturn.”

“When you think of the markets as an anticipatory mechanism, it makes perfect sense,” says Charlie Mahar, president and chief investment officer for Tealwood Asset Management in Minneapolis. “Investors are already looking ahead to the post-recessionary market. After the selloff, they are on the hunt for bargains—and they begin to bid up prices on the stocks of companies that will do well coming out of a recession.

“You’ve seen something like that already in the big rally we’ve had in the homebuilders’ stocks,” he adds. “The current climate couldn’t be worse for those companies. The market is looking to the future—when things turn around.”

Zhuang found in his research that during past recessions, returns were fairly weak at first. A year after the start of a recession, the Standard & Poor’s 500 Index had increased only 2.95 percent on average (see table). In only three of the past nine recessions, however, had the index dropped at the one-year mark, and at three years, performance had improved markedly.

So back to our original question: How do markets fare during a recession? They actually do fine, and they bounce back fairly quickly. So don’t worry about what you can’t control—your job is to worry about retirement, your children’s college education, or a new or different home. As history illustrates time and again, long-term bets are the way to go.