It’s true, recessions happen. Generally speaking, they consist of two consecutive quarters of negative GDP or a significant decline in economic activity that is spread across the economy and lasts more than a few months1. Since WWII, the average recession has lasted 11.1 months, according to NBER (National Bureau of Economic Research). Are we in the midst of one right now? “Experts” are weighing in all over:
- A major recession is coming, Deutsche Bank warns.
- The US economy is ‘nowhere near a recession this year,’ says an economist.
- Elon Musk says we're in a recession.
- No recession imminent, Yellen Says.
- Suze Orman thinks a recession is imminent.
Clearly, it’s impossible to deduce whether or not a recession is imminent by listening to the “experts”. The question is, does it actually matter whether we are in the middle of a recession now or if one comes in the future when it comes to your portfolio? In a recent post2, Ben Carlson took a look at every recession since WWII along with S&P 500 returns in the 6 months leading up to the recession, during the actual recession itself and then one, three, five years, and ten years from the end of the recession:
Here are some key takeaways:
- The stock market and the economy are not always in sync with one another.
- Sometimes the stock market front runs the economy. Sometimes the stock market is too slow to react to economic data. Sometimes stocks fall as the economy is contracting. Sometimes stocks bottom well before the economy does.
- Most of the time, the stock market does very well after a recession is over.
- The average one, three, five and ten year forward returns for the S&P 500 following a recession are +20.9%, +48.6%, +93.5% and +256.4%, respectively.
The reality is that recessions can only be confirmed via hindsight. By the time the NBER has figured out the start of a recession, it’s usually close to the end. If you were betting that a recession would tell you that the market was going to go down, that could be wrong as well (half of the time, the market had gains during a recession). Trying to time the market is just as hard during recessions as any other period of time, so we suggest not attempting it.
Past performance is not a guarantee of future performance. The views expressed herein are exclusively those of Benedetti Financial, Inc. ('BF') and Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. BF and EA portfolios may contain specific securities that have been mentioned herein. BF and EA make no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.