R-E-C-E-S-S-I-O-N?

June 27, 2022
Share |

The R word is rearing its ugly head more and more across news media: R-E-C-E-S-S-I-O-N.

The technical description of a recession varies, but one common definition is when the nation’s economy has two straight quarters of negative Gross Domestic Product. The first quarter of 2022 GDP’s number was negative. According to this month’s forecast of the Atlanta Fed’s GDP Now, the current anticipated estimate for the second quarter is zero.1

Ouch.

So, might we be in a recession already? We shall see.

Some banks are indicating it as a possibility. Recently Goldman Sachs put the odds of recession at 30%2, Bank of America thinks its 40%3, and Morgan Stanley’s CEO had it at 50%.4 (Sometimes you wonder if the head of these banks sit around and chat over martinis like it’s some kind of bidding war, “Hey, you go 30, you go 40, and I’ll be the bad guy and go 50?”)

The everyday investor wants to know what that means for the stock market. The Wall Street Journal posted the above chart from Deutsche Bank that shows how the stock market has performed during recessions since World War 2.5 The median—statistics nerds know is the middle number in a list, not the average—decline of the S&P 500 is 24%.6

At the time of this writing, the S&P 500 has already practically hit that, and we aren’t even officially in recession…yet?

Depending on how one looks at it this could be good news (damage mostly done) or bad news (more decline to come).

Remember we are already in a bear market. Another WSJ article shows that since the 1950s, the median (there’s that word again) S&P 500 performance after closing in a bear market is higher one month, three-month, six-month, and one year out; furthermore, it has only been “down in the year following bear market entrances three out of 12 times”.7

That’s encouraging. Bear markets can make gutsy buyers quite happy in the long run.

Recessions, though, often bring more challenging bear markets than non-recessionary bears. Ben Carlson, using data since 1928, shows that recession bears tend to average longer (390 days vs. 202 days peak to trough) and deeper (-39.4% vs -26.1%) drawdowns.8

Be prepared.

Again, who knows if we are in one or not. Predictions are not promises. Data changes and changes fast. Now what?

Well, keep the big picture in mind. Focus on what you can control. Don’t let your emotions dictate your decisions. Recessions happen and are part of the economic cycle. The stock market will go down. Historically, it has gone back up. Time-in, not timing matters most. Volatility is normal. Get educated. Don’t be brainwashed by the latest panic porn. Live life. Value your relationships with others more than your relationship with your TV, phone, or social networking. Have a plan.

All the above is true and perspective helps, but no one said it would be easy.

If you need another set of eyes and ears, reach out or send a friend. We are here.

------

Sources:

1. Accessed online: https://www.atlantafed.org/cqer/research/gdpnow

2. Accessed online: https://www.bloomberg.com/news/articles/2022-06-21/goldman-warns-us-recession-risk-now-higher-and-more-front-loaded

3. Accessed online: https://www.reuters.com/business/us-economy-has-40-chance-being-recession-next-year-bofa-2022-06-17/

4. Accessed online: https://www.reuters.com/business/finance/bank-americas-cfo-says-no-sign-recession-credit-deterioration-2022-06-13/

5. Accessed online: https://www.wsj.com/articles/stocks-historically-dont-bottom-out-until-the-fed-eases-11655594823

6. Ibid.

7. Accessed online: https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB

8. Accessed online: https://awealthofcommonsense.com/2022/05/the-2-types-of-bear-markets/