The “Fed” (the Board of Governors of the Federal Reserve System) has raised interest rates 5.25% since March of 2022…an unprecedented rate of increase in such a short time period. This has resulted in an “inverted” yield curve...i.e., the six-month rate is at 5.5% and the 10-year rate is at 3.9%. This anomaly, having happened only eight times in the past 60 years, has been a reliable indicator of a recession to follow, historically 10-13 months later. The last six inversions preceding today’s all resulted in recession. If we look to the inception of the inversion, that places the starting point as October 2022…and the 10 to 13-month timeframe indicates a possible 2024 recession. The American Institute for Economic Research issued their forecast in March 2023 predicting a recession within twelve to eighteen months…by end of summer 2024. (If you are REALLY bored, jump over to their website and dig through their data on the Leading, Lagging and Coincident Indicators…)
So maybe I didn’t miss the recession after all…
What are the implications to investors if a recession occurs? Well, that depends. For investors who have taken advantage of higher interest rates and taken exposure to fixed income (i.e. bonds), the typical Fed reaction to a recession is to lower interest rates, which causes fixed income prices to rise. Not a bad outcome if you have been receiving the best yields in 40 years, and some increase in value as rates go lower. However, on the equity side (stocks), if history repeats itself, the outcome is less favorable in the short-term, but if you stay the course of your plan, the market has historically rewarded investors. Being informed of what awaits you makes staying the course easier.
Let’s look at what awaits the equity markets in past recessions. Since 1950, the average recession bottoms with a 21% drop in the S&P 500 at 169 days and ends after 312 days with a near complete market recovery. The average year after the formal end of the recession sees a 15% S&P 500 return, extending the recovery to a pre-recession new market high*.
This speaks to why we spend time interviewing clients and use our risk analysis tools to create asset allocations. During times of falling markets, staying the course is difficult. During periods of raging bull markets, the fear of missing out will be the siren song for investors to drift away from their risk tolerance profile…and take on risk they are not psychologically prepared to handle (risk tolerance), or not financially prepared to handle (risk capacity). You should make changes to your asset allocation due to changes in your circumstances, risk capacity or time horizon…not what the markets are doing in the moment or even the most recent quarter or two. In hindsight, the perfect portfolio is a case of “coulda, shoulda, woulda..”, not the real world where the protection of diversification means you are never fully invested in the best performing assets, but taking advantage of diversification to align your risk tolerance and risk capacity with your goals. Performance is not measured as your portfolio versus the headline grabbing stock market, but your portfolio on a risk adjusted basis versus the probability of reaching your goals.
On another note, we have recently experienced the misfortune of clients passing away. We encourage you to sit down with us and let us help you make sure your estate plan is up to date and will accomplish what you desire. If necessary, we can refer you to qualified legal counsel for further assistance.
We are, sincerely yours,
Dave & Drew
*We endeavor to keep our information accurate and updated. The financial information presented has been independently obtained from government financial market information services, financial and research publishers, and various securities markets including stock exchanges and their affiliates. We cannot guarantee the accuracy, completeness, timeliness, or correct sequencing of the information.