Why investors shouldn’t overreact to talk of a recession
Stocks typically begin to recover during recessions, in anticipation of economic and corporate earnings growth.
The largest investment manager in the world (Vanguard) continues to project a 35% chance of a recession in Australia over the next 12 months, influenced in part by the potential of other developed economies entering recession. In this context, preliminary data suggesting that the U.S. economy contracted between April and June for a second straight quarter may be causing local investors to pay more attention to increasing recession speculation. Investors wondering if we’re headed for a recession and whether they should adjust their portfolios should consider history:
Stocks tend to begin to rebound during recessions, in anticipation of a return to economic and corporate earnings growth.
Stocks start to recover before recessions end
Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.
The chart above shows the one-year annualised return of the US Standard & Poor’s 500 Index from 1973 to 2021, including its performance during the period’s seven recessions, as defined by the National Bureau of Economic Research (NBER) and represented by the grey bars. In all cases, the stock market began to recover even as the economy continued to shrink.
Our consistent counsel
Whether Australia, the United States or any other country or region is in a recession or not, investors should avoid overreacting to the latest economic news and stick with well-considered, long-term investment plans. There is no evidence that efforts to time the markets reward investors. Quite the opposite, in fact.
Advice can help
Investors who want help setting investment goals or balancing potential rewards and risks in their portfolios may want to consider seeking our professional financial advice. In addition to the important function of building an appropriate portfolio, Calibre can play a valuable role providing counsel when emotions run high and preventing short-term stress from getting in the way of reaching long-term goals.
If you have any questions/thoughts in relation to this article or would like more information, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.
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