If you have been watching any financial news over the past few months, you have likely heard the words “possible recession” thrown around quite a bit. This has led to several questions from our clients during reviews and a few calls into our office.
As you may know, the past ten years have been very fruitful in the US stock market and we are now in the tenth year of the current bull market. Unfortunately, every bull market in history has come to an end, and at some point this one likely will come to an end as well. Recessions are not only expected, but they are a natural and necessary stage in the business cycle. The question that everyone has is “when will the bull market come to an end and when will a recession begin?”
That question is the million dollar question, and unfortunately, regardless of someone’s education or job title, no one knows for sure exactly when that will happen. It is also important to note that just because we have a recession, it does not necessarily mean that the stock market is guaranteed to go down (there is a good example of this in the graph below that shows the market going up during the recession of 1980). In contrast, the stock market can go through a correction without having a recession. A recession is defined as two consecutive quarters of negative GDP growth while a market correction is defined as a 10% or greater drop in a financial market. In summary, a recession and a market correction are two different things that are often related, but are not synonymous.
In addition to this, market corrections rarely last long. According to a study conducted on the Dow between 1945 and 2013 by John Prestbo at Market Watch, the average market correction (which worked out to a correction of a 13.3% decline) lasted a mere 71.6 trading days, or about 14 calendar weeks.
Many in our industry, including economists and market experts, will take educated guesses as to when a recession will occur based on forecasts and economic indicators. LPL Research is very diligent in keeping us informed on this subject by releasing a quarterly recession watch report. You can click on the link to view the latest report. The conclusion of the research in this report is that, based on certain indicators, there is a moderate chance of a recession within the next year.
All of this said, we feel that the more our clients are mentally prepared for market volatility, the less likely they will be to make poor decisions during that time.
Here are some FAQ’s in regards to what a recession may mean to investment accounts:
Does this mean that I am going to lose money on my equity investments if the stock market goes down during a recession?
The answer to this question is no. The only way that you lose money on an equity transaction is if you sell it at a price below the value that you bought it at. If you own a quality stock or bucket of stocks, they may temporarily devalue during a recession, but as long as you don’t sell them while they are valued low and they rebound when the market rebounds (which we cannot guarantee that the market will rebound, but we can say that it has rebounded and then gone on to even higher levels every other time in history), it will still usually be a good long-term investment.
Should I take all of my stock market investments and cash them out and then try to buy back in when the market is low?
In theory, this sounds like a brilliant idea. The challenge to this is that as mentioned above, no one truly knows when the market is at the high and when it is at the bottom. There are many reports coming out this week with economists predicting that the stock market will go on another major run before we go into a recession. In other reports (very few of them), economists are predicting that we enter into a recession within the next six months. On both sides of this argument, there are ivy league educated economic professionals with completely different view points to each other. In March of 2009, when the stock market hit it’s lowest point of the great recession, many economists thought that the market was going to continue to drop to even much lower levels, but low and behold, the stock market began the bull market that we are still in today in that very month. So our answer to this question is that trying to time the market can be a losing proposition in many cases, so we believe that owning quality investments over the long term is a better strategy.
If we go into a recession, will it be as bad as “The Great Recession” in 2008-2009, and how much will the stock market go down?
People forget exactly how rare the Great Recession was. If we were talking about the weather, it would likely have been called a “100 year storm”. See the following chart that will show you, according to the national bureau of economic research, how the stock market has performed in the year prior, the year of, and the five years following each of the last nine recessions. As you can see, in each of those recessions, the S&P 500 was up a minimum of 24.8%, and an average of 78.7% five years following the recession.
Is there anything that I can do to lessen the impact of temporary losses on my investments or make my portfolio perform better if we go through a recession?
There are several ways to dampen the temporary devaluation of a recession without fully trying to time the market.
- There are a number of new products that will allow you to invest money in an instrument that will permit you to participate in market upside while seeking downside risk mitigation. If you are interested in learning more please give us a call.
- You can always lower the risk profile of your account. I would say that this is very similar to trying to time the market, because by changing your risk profile, you run the risk of the market continuing to go up after you de-risk the portfolio. In addition, you might be too late or too early reallocating to your current risk profile. However, if you are extremely risk averse, this could be a an option for you.
Is there any way to profit from a recession?
You may have heard the term “buy low, sell high”. Well if the market temporarily devalues during a recessionary period, this can be a great time to “buy low”. If you have a stockpile of cash or are thinking about putting money into long term investments in the stock market, buying in during a recession may prove to be a great long term move.
If I am retired and taking withdrawals from my account, how can I avoid selling equity investments when they are valued low?
This is a great question and one that we get often. It is very important that if you are taking withdrawals, you sell the correct investments at the correct time to extend the life of your portfolio. If the stock market devalues, then it may be better to take your withdrawals from other assets such as bonds or conservative assets in your portfolio. These asset classes, historically, tend not be as affected from the market decrease, and allow your equity investments to rebound without having to sell them at a lower level.
If you would like to have a conversation about your accounts or discuss the opportunity to utilize some additional measures that seek to protect against market depreciation or a recession, set up an appointment to come see us or visit on the phone. We look forward to talking with you soon.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through V Wealth Management, LLC a registered investment advisor. V Wealth Management and V Wealth Management-Metcalf Partners are separate entities from LPL Financial.
The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All investing involves risk including loss of principle. No strategy assures success or protects against loss. Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.