Is a Recession Ahead?

There’s been a lot of talk lately about the dreaded “R” word: Recession. It conjures up scary images the make us think of one even more dreaded word: Depression.

In reality, recessions are not uncommon. There have been 48 recessions in U.S. history and 15 recessions, including the Great Depression, in modern history. The most recent was a very short recession lasting from February 2020 until April 2020. While the technical definition of a recession is two consecutive quarters of negative GDP (gross domestic product), the NBER (National Bureau of Economic Research) looks at monthly data to evaluate contractions. This is important to note because we have actually had periods of slight GDP increases during even major recessions, such as 1973 through 1975.

Recessions since the Great Depression have lasted an average of 11 months. This is important, I think, because people often associate recessions with very long periods of a poor economy. Understanding that they last less than one year on average helps to put them into perspective.

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Many investors also have trouble distinguishing the economy from the stock market. They incorrectly assume that if one is down, the other must be as well. While it is true that they often decline similarly, the stock markets typically recover faster than the economy itself.

By definition, we don’t know a recession has started until it’s already happened. Likewise, and this is really important, we don’t know a recovery until its already started, either. It’s only after markets have continued to rise can we look back and pinpoint the low point of the market.

This is why it is so important not to try and time the market. You’ll never guess both the top and bottom of the market. This is crucial because an investor who invested in the S&P for the 20 years ending Dec. 31, 2020, would have averaged a total return of 7.47%. That same investor had they missed only the best 10 days out of 5,036 trading days in that time period would have only averaged 3.36%. If they missed the 20 best trading days, their return would drop to an average of 0.69%.

This cycle of getting out when things are bad, and then getting back in when you “feel better about things” is the reason investors who behave like this never make any money in the market.

So, are we headed for a recession? While that is hard to guess, I am becoming increasingly more convinced that yes, we probably are. I do not think it will be a long or particularly deep one, but given the pace at which the Federal Reserve is raising interest rates, (and will likely continue to do so) in an attempt to slow inflation, I think some sort of recession is imminent. With that said, we do not know if it will be narrow and long or deep and short.

If I were to speculate about the timing of a possible recession, I would guess that it could happen in the first or second quarter of 2023. While I don’t believe that it will be a long recession, things could happen to make me change that viewpoint. There is still good news out there. including strong consumer demand, low unemployment, large corporate cash holdings, high savings rates, etc. These reasons lead me to believe that a future possible recession may not be as bad as many fear.

The truth is, only time will tell, and we won’t know it until its already happened.

With this in mind, don’t make radical and potentially unwarranted changes to your investments unless your goals or risk levels have changed. Stay the course.

*Source: Franklin Templeton