#93 – How to stay focus in investing during a recession?

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Investing – In this article you’ll find:

Investing – Which are the performances of the S&P 500 during the recessions

Investing – How much important is don’t make the mistake that the markets are the economy

Investing – How the markets perform once ended the recessions

Investing – Where we are now until the average end of the recession

Here you can find other articles:

Investing – City National Rochdale

Economic Momentum Slowing, Recession Risk Rising

• Household and business fundamentals still solid, but slowing.

• Inflation pressures to remain elevated.

• Fed needs to aggressively tighten to slow economy and wages.

• We have above consensus estimates for Fed funds rate.

• We have lower than consensus expectations for GDP and earnings growth.

Potential Economic Scenarios

• US economic momentum slowing, recession risk at 50%.

• Private sector fundamentals remain broadly strong, should provide some cushion against growing headwinds.

• Unprecedented uncertainty creating too many unmanageable forces that could negatively impact economy.

Consumers Still Spending, but Strength Being Tested

• Household balance sheets are very strong, asset values and cash balances are up, and liabilities are down.

• However, real incomes are falling, forcing households to draw down savings to support spending.

• Reduced household purchasing power will likely lead to slower spending in months ahead.

Will Consumers Remain Resilient?

Sentiment has been trending lower for some time, but is now being more reflected in slower activity.

So far, strong job and wage gains have supported consumer spending.

However, higher inflation is increasingly forcing households, particularly lower income, to draw down savings.

Vulnerable to exogenous shocks.

Housing Already Is Feeling the Pressure

Housing is facing increasing headwinds of higher interest rates and falling post-pandemic demand.

Homebuilder sentiment and activity is now at its lowest level since June 2020.

Low inventories have helped support elevated home prices but increases appear to be plateauing.

More Hawkish Fed Raises Risk of Policy Misstep

Policymakers have pivoted sharply over the past six months and are on a mission to rein in inflation.

They now plan to move the funds rate into restrictive territory by year-end.

They will be very aggressive at reducing the size of their bond portfolio.

Big Rallies Are Normal During Bear Markets

The average maximum rally during bear markets has been 14.5%.

Only the pandemic bear market did not experience a significant pullback post-bottom.

Not yet expecting a sustainable rally given macro risks and prospects for earnings estimate reductions.

Investing – Raymond James & Associates

Weekly Market Guide — Macro: Us

The median Fed projection for the terminal rate is 4.6% in 2023, implying one more 25bp rate hike early next year before holding steady (with no cuts) for the remainder of 2023.

Also, economic growth projections are very slow and below trend (0.2% GDP growth for 2022, 1.2% for 2023), though estimates for core inflation are 2.8% in 2023 and 2.3% in 2024.

In sum, the Fed believes it will have to raise higher, stay there for longer, and hurt economic growth more in order to bring inflation down.

Global Bond Yields

Inflation is a global problem. For example, German August PPI rose 7.9% m/m and is now up 45.9% y/y! Elevated inflationary readings like this are resulting in tighter monetary policy and higher bond yields around the globe.

As you can see, the 10-year benchmark bond yield in the Eurozone, United Kingdom, and US all broke out recently to their highest levels in years.

While admittedly the moves appear overdone in the short-term, their continued ascent is a negative influence on equity market valuations and trends globally.

Recessionary Bear Markets

Despite the recent dataflow and Fed message supporting our position that equities may struggle in the coming months, it does not dissuade our long-term positive view. Nor does it change our belief that a lot of negative news is already priced in.

We believe that a worst case scenario could bring S&P 500 downside to the 3000–3200 area (not saying this has to happen), which would be on par with the 33% average decline experienced in recessionary bear markets. There is also fundamental and technical support for the 3400–3600 area.

Moreover, recessionary bear markets bottom 13 months from their peak on average, which would line up as early 2023.

The index has already declined 24% over ~9 months, so the majority of this bear market’s weakness is likely behind us at this point.

Investing – Virtus investment parners

Is the U.S. economy in a recession?

Likely because we just learned that real GDP contracted for the second straight quarter. And, the last 10 times we’ve seen consecutive quarters of negative economic growth, the U.S. was indeed in a recession.

Recessions Happen

Since 1871, there have been 30 recessions in the U.S., averaging one every five years. And in spite of that fact, the S&P 500® Index has gained 6.9% annualized over that time, after adjusting for inflation.

There’s been no better long-term builder of real wealth in the last 150 years, and recessions are a necessary part of the package, for there’s no upside in investing without intermittent downside.

Don’t Wait for the Robins

Maybe you can’t time a recession, but why should you invest new money when the economy is contracting?

Wouldn’t it be better to wait for the news to improve and the downturn to end before adding to your portfolio?

Historically, the answer has been a resounding no. During the last six recessions, the S&P 500 Index has gained an average of 61% from its low by the time the official end of the recession was declared by NBER.

One costant of all recessions?

The one constant is that all recessions and bear markets of the past have ended, with new expansions and all-time highs following at some point in the future.

With all the things to worry about today, that should be a comforting thought for long-term investors.

Historically, if you stayed the course, you were eventually rewarded.

That’s true regardless of whether we’re in a recession.

Investing – My conclusions

We’re in recession, the S&P 500 is down 24% more or less, so the steps that we’ll take over the next months are important.

With this research we have seen how important is not follow the economy when we are in investor’s mode and which are the performances once the recession is ended.

The important part to read more than once I think is the constant of all recessions, that all bear markets of the past have ended.

We’ve seen another time how the longer term and the patience in this world can make the difference and you have to know that what you’re doing now is essential.

Investing – Institutional Considerations

Household and business fundamentals still solid, but slowing.
US economic momentum slowing, recession risk at 50%.
Real incomes are falling, forcing households to draw down savings to support spending.
Housing is facing increasing headwinds of higher interest rates and falling post-pandemic demand.
Homebuilder sentiment and activity is now at its lowest level since June 2020.
The average maximum rally during bear markets has been 14.5%.
The median Fed projection for the terminal rate is 4.6% in 2023, implying one more 25bp rate hike early next year before holding steady (with no cuts) for the remainder of 2023.
The Fed believes it will have to raise higher, stay there for longer, and hurt economic growth more to bring inflation down.
Recessionary bear markets bottom 13 months from their peak on average, which would line up as early 2023.

Investing – Institutional Considerations

The index has already declined 24% over 9 months, so the majority of this bear market’s weakness is likely behind us at this point.
Since 1871, there have been 30 recessions in the U.S., averaging one every five years. And in spite of that fact, the S&P 500® Index has gained 6.9% annualized over that time, after adjusting for inflation.
During the last six recessions, the S&P 500 Index has gained an average of 61% from its low by the time the official end of the recession was declared by NBER.
The one constant is that all recessions and bear markets of the past have ended, with new expansions and all-time highs following at some point in the future.

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics and in doing so he shares with you the most interesting charts and comments.

Disclosure

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.