Our blog in October 2022 discussed the market noise of a declared bear market and its impact on the investor psyche. In that post we discussed the definition of a bear market and possible causes (and listed the post bear markets performance of the S&P 500). The point of our blog then was to ask the question: should we stay invested when the market is experiencing such volatility as a bear market. Investors who make buy or sell decisions based on emotion due to short term events, often leads to poorer outcomes. Our blog then mentioned that during the 12 recessions prior to 2022 there were only three (1973, 2001 and 2008) where the market was worse off six months and one year later. The results are in for the June 13, 2022, bear market, and the six month and one year follow up performance was 7.2% and 16.5% respectively (not including dividends). Based on the historical median follow up performance data on all declared bear markets from 1957-2020, combined, it is better to stay invested than to exit the market.
A Look to the Forward—What’s next?
Fear of Recession is the market noise of today. Historically there are several converging economic indicators that can lead to recession. These indicators include the following:
- Inverted Yield Curve – Defined as, where short term interest rates are higher than intermediate to long term interest rates.
- Rising Unemployment—From cycle trough.
- Consumer Confidence—Declining from previous year.
- Housing Starts—Declining at least 10% from the previous year.
- Leading Economic Index—Declining at least 1% from the previous year.
At present, some of these indicators are positive while others are negative.
What happens to the stock market during a recession? The exact timing is hard to predict, but it’s still wise to think about how one could affect your portfolio. Bear markets, like we discussed above (market declines of 20% or more as confirmed on June 13, 2022), and recessions (economic declines) have often overlapped with equities leading the economic cycle by six to seven months on the way down and again on the way up.
The below chart shows the average change in the S&P 500 index and in relation to economic activity of all completed economic cycles from 1950-2021 and illustrates that market performance has been a leading indicator of economic activity on the way up and down – not a lagging indicator as one might expect.
Aggressive market timing moves, such as shifting entire portfolios to cash, may backfire. Some of the strongest returns can occur during the late stages of an economic cycle or immediately after a market bottom. A dollar cost averaging strategy, in which investors systematically invest equal amounts at regular time intervals, may be beneficial in down markets.
The moral of the story is to not become distracted by market noise which currently is the fear of recession. While cash may sound attractive at 5% yield, the interest rate yield curve is inverted now but rates on cash could go lower in the future; and if you get out of the market now, how can you possibly know when to get back in.
Making emotional decisions regarding your financial well-being may cause tremendous long-term harm. If you are feeling nervous about the state of the market or market noise, don’t hesitate to schedule time with us to discuss. Let’s get your plan brought up to date and look at the long term before making a knee jerk decision in the short term.
Schedule here: https://definedwm.as.me
Other sources:
Capital Group, https://www.capitalgroup.com/advisor/insights/articles/guide-torecessions.html#causes
The Conference Board on Economic Data
Yahoo Finance-Historical market pricing for S&P 500
