What Does "Recession" Mean for Investors? Market Update - Q2 2022

What Does

The start of 2022 has been a tough time for investors.  With an official bear market occuring and two consecutive quarters of GDP contraction (typically referred to as a recession), investors can easily become discouraged.  We believe that there are certainn things investors should be focused on at the moment - Join Andy Stolz, CFA, as he gives some tips for the 2nd half of 2022.  


Video Transcript...

Well, it's 3:24 AM which can really only mean one thing... It's time for a market review. And a hike of course, so here we go.

Well, we made it. We're at Mount Saint Helens, but sunrise is going off right now so I'm gonna get the drone in the air, we'll do the market review, and then right after that, we're gonna talk about the word recession and what it might mean for investors.

So for the US stock market, which is 60% of the global stock market, quarterly return was -16.7%. Really bad three months, which brings the 12 month rolling return to -13.87%. If we look internationally, a similar story.  Down 14.66% for the quarter and down 16.76% for a rolling 12 month period. And then looking at emerging markets, even worse there. Down 11.45% for the quarter, but for the rolling 12 month figure down 25.28%.

As we look at equities in general, just a rough period in the market for equity. Unfortunately, the story doesn't get much better when we look at real estate and fixed income. So when we look at real estate, the quarterly performance was down 17.27% which brings the rolling 12 months to -10.61%. So rough time for real estate as well. Somewhat unexpected is a time frame where you have really poor performance in equity, but almost equally poor performance in bonds in portfolios.

But if we look at this, basically, fixed income returns for US and international, for the quarter, we see -4.69% and -4.01%, respectively. And then for the rolling 12 month period we see down 10.29% for the US markets and down 7.75% internationally.

So just a tough time frame in the markets. I think on top of that we're hearing a lot more about the word recession. We just had two quarters in a row of GDP decline. Historically, the last 20 times that's happened, we've officially declared it a recession. For whatever reason, this time, they're saying that's not what they're going to call it.

In reality, the markets don't really care what they call it. Markets are forward looking, economics tend to be backward looking. It looks at the data that we've received based on what just happened. So markets can think a little bit faster than economic data shows up.

So if we look actually at what we'd call recessions historically, over the last 50 years we've had roughly seven of them. And here's a chart that shows those seven. You can see the number of months that they tended to last, and you can also see the monthly return during those times. You can actually see five of those had positive monthly returns over that whole timeframe with two of them being negative, and a couple of them actually being higher than the average expansionary market return.

So what you really have to do when you're talking about a recession is separate it into two periods. If you're looking at the whole recession over that timeframe, on average, the monthly return during recessionary periods was -0.05%, so basically zero. And you might expect it to be more negative than that.  It certainly feels that way as you're going through it. But then when you look at the positive return during expansionary periods, you see 1.2% per month during expansionary periods which is roughly 87% of the time of this timeframe.

But if you dig into those numbers a little bit and you look at sort of the peak to trough that happens during the recession, that initial, at the onset of a recession, it's almost kind of the first half of a recession historically, you'll see that you have very negative returns at the beginning of a recessionary period. so in this case you see -2.25% per month, but then for the second part of that recession you see actually fairly strongly positive numbers of 2.15%, which is again higher than that expansionary period number. So it's important to sort of keep all of that in perspective as you're thinking about it.

Because you experience he decline of that market at the beginning of that recession, and that's when you're tempted to make adjustments to a portfolio, or potentially go to cash when in reality, even when we're still in a recession you can have very strong returning time frames. And then if you look at expansion you see the beginning of an expansion having a higher return than later expansion periods.

So one thing to note, you an still have positive returns during an entire recessionary environment, but certainly during the second part of a recession, oftentimes just after a recession has been announced or determined.

So, something to think about as we're thinking about recessions in general. The market works on a different timeframe than the economy.

So I'm gonna run up the hill, pick some huckleberries, and then we'll talk about maybe a couple more pieces and how we should be thinking going forward now that we are where we are and markets have done what they've done.

Well, huckleberries aren't quite ready yet. So no berries today. But want to just finish with a final thought. So sort of along the same line as what we were talking about with returns can still come during recessionary environments, I want to just show one chart. This is about the dangers of trying to time the markets.

So if you look here, growth of $1,000 over a 25-year timeframe grew to $10,367. So roughly 10 times growth. Now if during that same timeframe if you were trying to time the market and went to cash or something, if you missed the best one week of performance, you only had $8,652. So 15% - 20% less by just missing one week. If you missed a month, ended up with $8,279. And then three months, six months, etc.

So really, when you're trying to time the market, data and research would suggest that it's a very difficult thing to do.

So just because we either are or aren't in a recession, or one's coming or isn't coming, doesn't necessarily mean you should make large adjustments in your portfolio. History says that long-term returns are there for you, but you have to stick to your strategy over long-term timeframes and you have to ride out these periods of volatility. So the hope is that you don't miss that best week and limit your long-term expected returns because of bad judgment.

So I guess that's the summary of where we're at. It's been a tough first six months of the year. July was a little better, which is nice, but doesn't necessarily mean that the volatility's over. Even if we are in a recession currently, it doesn't necessarily mean we can't have another one next year. The Fed is still raising rates and they're not very good at triggering a soft landing like they might have us believe. But really, volatility is expected. It's normal, and when you have built your portfolio on the right principles to begin with the most important part is just staying invested.

So as always, if you have any questions feel free to reach out, we're here for you and we'll talk to you soon.