Recessions happen. Stocks fall. And other reasons NOT to worry.
Last week marked what seems like the 800th time in the last decade that an imminent recession has been identified by (choose your favorite economist or market forecaster). Only this time, we apparently have to accept it as a certainty, thanks to something called an inverted yield curve.
As you may have heard by now, this phenomena has preceded every US recession dating back to 1955 (there have been 9). This fact is understandably causing quite a bit of anxiety for investors.
The inverted yield curve really deserves a write-up of its own, so we’ll set that aside and focus on what you really care about – the potential for an upcoming recession and what you can do.
Recession you say?!
Hearing the word recession likely drums up some rough memories, most recently related to the Great Recession of 2007-2009. But let’s remember that the last recession was one of the worst the country has ever experienced. The worst since the Great Depression. It was the exception, not the rule. And there were some very unique problems at the root of it all, like a historical concoction of a massive housing bubble, super sketchy lending practices, and corporate greed and corruption that reached an all-time high, even for Wall Street standards. We are far from any of that today, thanks to many of the steps taken during, and in the aftermath of the crisis.
The generally accepted definition of a recession is two or more consecutive quarters of negative economic growth. Recessions are an expected and unavoidable stage of every economic cycle. It’s the length of each cycle that is impossible to predict. Economies grow and eventually need to take a breather. Going back all the way to 1854, the average economic expansion has lasted about 39 months, while the average recession has lasted about 17 months. As I write this, we are currently 122 months into what is now the longest economic expansion in US history. This only adds to the argument that we are overdue for a slowdown at any moment. Or does it?
Recessions don’t just happen because they are “overdue”. The economy has no mind of its own. It doesn’t know it’s been partying too hard for too long and that at some point it’s going to have to suffer through the hangover. That said, it’s understandable to expect the likelihood of a recession to rise the longer this current expansion goes on. And the worry now is that the more Americans and their employers begin to worry about the increased possibility of an upcoming recession, the more likely it becomes a self-fulfilling prophecy.
So, as an investor, what do I do?
Let’s assume for a moment that a recession really is imminent, or already underway. We often don’t actually know we’re in a recession until months or even a year or more into the recession, since economic data is gathered after the fact, and often revised later. Because of this, the stock market doesn’t necessarily react in the way you would expect.
The stock market has been known to decline significantly as data begins to point to a slowdown and then often begins recovering well before the actual economy starts to grow again. But per usual, there is nothing predictable about it.
In fact, during 4 of the last 9 recessions we’ve experienced, stocks actually averaged positive returns of over 14%. And if we look at every single one-year period following the official end of all 9 previous recessions, the average annual return was just over 15%, which happens to be well above the annual average return for US stocks across all years dating back to 1929, recession or not. Just remember this – the performance of the stock market and the economy are not one-in-the-same.
As they say, hindsight is 20/20. So of course, it’s easy to look back at these numbers or any chart of US stocks over the last 70+ years and see that recessions actually have historically offered investors some of the best opportunities to either stay the course or invest MORE money in the market, not panic and run to the sidelines. But in real time, recessions can feel very different. And that’s important to realize. There are typically days, weeks, months, and longer, where you may look at your portfolio and see red. Sometimes a lot of red.
The trick to staying sane and keeping your cool as an investor during a recession, is to always make sure that both your mind and your portfolio are prepared to follow a disciplined strategy that allows you to take advantage when prices drop (or as I prefer to look at it, when the stock market goes on sale), rather than panic. The best way for long-term investors to view any market decline should be as an opportunity to stock up and take advantage of a sale, since your money is able to buy more shares than it could last week, last month, or last year. Sales are a GOOD thing. Yes, even (and especially) for stocks.
Make sure your portfolio is designed to survive and thrive.
If you’re investing for retirement on a regular basis, like through your employer’s 401k or even an IRA or Roth IRA, those regularly scheduled investments allow you to automatically take advantage of these market “sales”. And if you can count your time until retirement in decades instead of years, your portfolio should be heavily invested in stocks. Sure, the ride through the dips can feel more painful for younger, more aggressive investors, but that bumpy ride is exactly why stock investors tend to earn so much more over time. Market dips are not losses unless you sell. In the entire history of the stock market, 100% of market declines have been temporary. Patience is key.
If you’re someone nearing retirement, I know what you’re thinking. Waiting it out is all fine and dandy, but I can’t afford to see my balance drop right as I’m about to retire. This is exactly why YOUR portfolio should ideally include enough bond and cash exposure to help preserve that income portion of your account when times get rough for stocks. This is especially important for those already drawing on their investments for income. Viewing your portfolio as two separate buckets, one for growth (stocks) and one for income and preservation (bonds/cash), can help you stay comfortable riding out any storm the market may or may not have on the horizon.
Wondering if your 401k is properly invested? Blooom is here to help.
The bottom line
To be clear, we’re not predicting an imminent recession. We’re not in that business. But as advisors, it’s our job to remind you that it’s not a matter of IF a recession or a stock market decline will happen again, but WHEN. Every recession is different, but every recession thus far has ended. Just as every market crash, of any amount, has ended in a recovery. Don’t run from a good sale when it comes your way. If you stay focused on the long-term, your future self will thank you.
The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments will go up and down in value based on what happens in the markets. We do not make any guarantees your investments will grow.