You probably heard the news. At 7:30am CST this morning GDP for the 2nd quarter was reported to be a negative number. That’s two consecutive quarters of negative GDP prints. That meets the technical definition of the “R – Word.”
Recession.
There are people very happy to hear this news. I suspect the talking heads at CNBC and Fox Business have been praying for this second negative quarterly GDP print. A recession announcement in July is Christmas coming five months early for them. Their ratings will jump. People hear the “R – word,” and they get scared. They tune in. Ad dollars multiply. Everyone in the media is happy.
Then there’s the politics of it. One side of the aisle says this is definitely a recession. Two negative GDP prints = recession. Plain and simple. That narrative benefits them politically. The other side says other facts should be considered, particularly the unemployment rate, when determining if we’re in a recession. Employment data doesn’t look too bad, so we’re not in a recession. That narrative benefits them politically. All you need to know is whether they have an R or a D after their name to know their opinion. It’s like watching fans during a football game. If you know what team someone is pulling for then you know their thoughts on the latest pass interference call.
I don’t really care about the politics of it. Nor the financial media’s ad revenue. I’m concerned with the impact a recession may have on our clients’ portfolios and financial plans. The chart below[i] shows the last seven recessions and the corresponding stock returns (S&P 500) in the six months preceding the recession, during the recession itself, and one, three, five and ten years after the conclusion of the recession:
Well...
That doesn’t look all that bad.
There is a common assumption that the stock market = the economy. It follows if economic news is bad, then the stock market must be doing poorly. Being in a recession is pretty bad economic news. So given the assumption stock market = the economy, being in a recession is pretty bad news for the stock market.
But stock market = the economy is a misperception. A rather universal one, unfortunately. If you begin with the assumption that the stock market = the economy your entire model is flawed. The truth is the stock market ≠ the economy.
The stock market doesn’t care about today. It cares about tomorrow. Today the news is we’re in a recession. The whole world found out at 7:30am CST. The stock market opened as it always does at 8:30am CST. And the stock market opened
positive. Why is that? The stock market cares about tomorrow. It’s already anticipating the recovery from the recession. The stock market doesn’t really care that we’ve now declared ourselves to be in a recession. It’s been anticipating that for awhile. Perhaps you noticed when we entered a bear market a few months ago. The focus of the stock market is on tomorrow, not today.
Keep in mind that the S&P 500 returned -19.74%[ii] during the first half of this year. That is, during the two quarters of negative GDP growth which define this recession. That would be the second worst return on the chart above, behind the return during the 2008 recession. Now, the recession of 2022 may last longer than two quarters. The stock market may begin pricing in a prolonged period of negative growth and sink lower. I have no idea how many more quarters of negative GDP prints we’ll see. Nor how the market will respond. Neither does anyone else (though plenty of people make money pretending they do).
But I do know the history of stock market returns during and after recessions. You can see that history in the chart above. Look at that chart again. Pretty rare for returns to be negative one year after the conclusion of a recession. Historically always positive 3+ years down the road. Am I concerned about my portfolio and our client’s portfolios?
Nope.
In fact, these market downturns are where you earn your long-term returns. Each of the last seven recessions has been immediately followed by five-year returns between 34% and 137%. Ten-year returns have been between 33% and 351%. Those who continue adding money to their investment accounts and reinvest the dividends they earn will be rewarded over the next few years. Warren Buffett says the stock market is a device to transfer money from the impatient to the patient.
So long term, I see nothing to worry about.
In the short term, anything can happen. And if your financial plan falls apart because of a market downturn in the short-term…
You don’t have much of a financial plan.
Sean Cawley, CFP®
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[i] “Timing a Recession vs. Timing the Stock Market.” Ben Carlson. A Wealth of Common Sense. June 7, 2022.
[ii] Ycharts, SPX Level Percentage Change, 01/01/2022 – 06/30/2022.