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, CFP^Ò

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