Skip to main content

Sound Advice: May 10, 2023

Recession Ahead?  Golden Opportunity!

There’s no reason to disagree with the likelihood that a recession looming ahead will bring more difficult economic times, including a pullback in business profits, substantial losses in jobs, and greater efforts needed by many families to make ends meet.  For knowledgeable investors, however, the downturns that accompany recessions invariably lead to more interesting (read: cheaper) valuations for stocks.

With few exceptions, stock market plunges are brought on by moderation and/or reversals in the ongoing pattern of this country’s economic growth.  But as is well known, investors tend to look beyond, often well beyond, the current level of business activity to get a better sense of what lies ahead. 

Recoveries always follow downturns.

Here’s the evidence: Since 1949, there have been 12 declines of 25% or more in the Standard & Poor’s 500 Index.  In the year following those declines, the average gain from the recession low was nearly 40%.  Two years later, the average gain was 54%. 

This needs to be viewed in two ways.  For those with the extraordinary ability and courage to buy when things looked bleakest, the rewards would certainly have been hefty.  But even if you were one of those folks who weren’t quite ready to get aboard until the picture began to brighten, there was still plenty of time to make money.

Of course, there’s always the minor matter of muddling through recessions and rebuilding the confidence needed to make commitments, especially at a time when others can only think of selling.  But the strength to go against the crowd is the key to doing a lot better than the crowd.

Given the recent string of bank failures, the Fed’s ongoing program of attempting to guide inflation into a more moderate range, and the central bank’s history of missing its target, one would not be off base expecting that the nation’s economy is en route to an interim hesitation in growth.  As in the past, that would be followed by an easing of interest rates for the purpose of spurring a business rebound.

Best to note the following axiom: Rising rates are accompanied by a falling stock market.  Easing rates are accompanied by a rising stock market.

Given where business conditions are now, it would be no surprise to see the Fed reverse course over the next three to six months.

N. Russell Wayne, CFPÒ

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more