Broker Check

Two Strange Bedfellows

May 03, 2023

They are unavoidable.  Any investor who wants to be rewarded with the superior long-term performance equities provide will experience at least two things along their journey:  a bear market and a recession.  Invest long enough and you will experience both, and in many cases, you will experience them more than once.  It’s a fact, albeit an unpleasant one.  

In my lifetime, I’ve experienced 7 Bear Markets and 8 recessions.  Some have been more memorable than others.  When bear markets happen, recessions typically aren’t far behind.  Of course, we all know what happened last year – the first bear market since 2009.  

Which means, what?  Yes, you guessed it; welcome to 2023 – The year of the most anticipated recession in history. 

Practically take a dart and throw it and you’ll likely hit on a “reason” why we will have a recession:  an inverted yield curve, interest rate hikes, the money supply collapsing, housing worries, massive tech layoffs, the list goes on and on.  Everyone knows it’s coming. 

But here’s the rub:  It doesn’t matter.  

What?  How can I say that? 

Because there’s a pesky little thing that constantly gets in the way of the narrative that recessions can have “catastrophic” effects on your financial plan – their called facts.  

Recently, Morningstar completed a survey that gives us a fascinating view into investors’ minds and their thinking on recessions.  Of those surveyed 75% of investors expect to lose portfolio value in a recession, with an average expected loss of -22%!  Wow!  

And as if that weren’t bad enough – 87% of those that responded expect to take action ahead of a recession.  

It’s not necessarily the recession itself that causes carnage in investor portfolios, it’s how investors deal with a recession that can mean the difference between success and failure with their investment results.  

The historical behavior of investors during recessions leaves a lot to be desired.  During past recessions, investors have seen net cash flows turn negative, cash hoards grow, and time horizons shrink.  What was a 20-year plan suddenly becomes a 1 year-plan; what was an aversion to hoarding cash, now becomes a priority. 

When you put emotions to the side (where I would argue they belong all the time, not just during recessions), you find that recessions aren’t the portfolio-wrecking hurricane that they are perceived to be, take a look: 

On average, stocks fall by a measly -1% in the six months leading up to a recession and fall a moderate -3.1% during a recession.  Do those sound like portfolio-destroying numbers?  Do those numbers justify the chicken with its head cut-off” reaction from the financial press when recessions happen? Does it justify scaring the bejesus out of investors when the averages are so meager? 

I didn’t think so either. 

We may need to reshape our thoughts about recessions. 

Recessions offer opportunities to reshape strategies to get closer to your goals, rather than further from them.  As overwhelming as the evidence points to the advantages of taking a long-time horizon with your investments, I don’t think that the financial press will be focusing on your long-term when talking about the coming recession.  I mean where is the fear in that?  

The clarity in your investment strategy only comes when you can see what’s currently outside what’s happening and that is not easy to do.  Regardless of whether we have a recession in 2023 or 2024, it matters not to your long-term retirement goals and providing a lifetime’s worth of income for you and your family.  

Recessions like a bear market do matter – they matter because they can potentially affect your behavior within your investments, which CAN move the needle on your investment results.  As we just saw in the chart above, any damage done to your investments during a recession will likely be done by your own actions, not because of the underlying performance of your investments. 

I can’t say it any more precise than the great Peter Lynch – “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.” 

Stay the course, my friends.