Broker Check

Investing Through a Recession

November 08, 2022
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It has been quite a long time since we experienced a meaningful economic decline in the US.  In fact, aside from the first two-quarters of the Global Pandemic, our economy hasn’t experienced a recession since the Great Recession of 2008 and 2009. Put another way, we’ve completely forgotten what a recession feels like! 

The decade of the 2010s brought some of the best economic times our country has seen:  little to no inflation, low-interest rates, consistent economic growth, and steady employment.  Market declines came largely from inflammatory, event-driven headlines, and were generally  “V” shaped in nature, meaning very quick downturns followed by sharp recoveries. If you only look at your account statements monthly, many of these downturns would have generated one sharp negative month, followed by consistent recovery in the ensuing months.

What Should You Expect? 

Here’s the cold hard truth: economic slowdowns are characterized by high uncertainty, a slow decline, and recovery, and come with frequent setbacks. Often,  this feels like one step forward and two steps back. Worse yet, we never know where the bottom of the stock market will be until long after it passes, and the recovery is well underway. The reality is that no one knows when major market and economic declines will happen, how long they will last, or when they will be over.  

There are signs we can point to and data that monitors how things are changing. For example, the stock market—which is considered a leading indicator—usually finds its low point about 6 months prior to a recession. As we write this the market is at its lowest point in 2022, which could align with early 2023 bringing the actual recession. This would follow nearly a year of interest rate hikes, a volatile election cycle, and numerous ups and downs.

A Bit of Good News 

If the market finds its low point about 6 months prior to a recession, what tends to happen in the following months? Since 1929, the S&P 500 has averaged a 1.1% return in the 3 months immediately before a recession, 1.0% during the recession, 24.5% in the year following the recession, and 14.7% for 3 years after. That’s the best case we can make for staying the course! 

Focus On What You Can Control 

We have found that there are 5 things that have the greatest impact on your success as an  investor: 

  1. Knowing What You Want 
  2. How Much You Spend 
  3. How Much You Save 
  4. Uncertainty of the Timing of Returns 
  5. Market Returns 

These are listed from “most control” to “least control.” “Uncertainty of timing” means taking into consideration that we can’t know when the good and bad years will come. Through risk  management, asset allocation, diversification, multiple investment strategies, and proactive  

income planning, we can have some control over this. Market returns, however, can’t be controlled, predicted, or manipulated by anyone.

Be Proactive 

Now is the time to review, adjust, and recommit to the long-term strategies you have in place. It is the time to educate yourself and take ownership over understanding how these dynamics work. We value wisdom as a core value of our practice and make every effort to educate, inform, and communicate these things to you. We know you entrust us to provide advice on your financial life and future, and we hold that honor and privilege in the highest regard.  

Thank you for the opportunity to be your Financial Advocate! 

If you or someone you know may benefit from discussing topics like this, or if you would like to get more information, please contact our office at 270-467-9664.

N. Drew Richey

Baird does not offer tax or legal advice.