Why investors shouldn’t overreact to talk of a recession

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.

• Stock recoveries may begin soon after recessions commence. Over the last half century, the earliest recessionary recovery in stocks began just two months into the brief economic downturn of 2020. The latest recovery started 16 months into the recession of 2007–2009.

• Recessions have been relatively short compared with most investors’ time horizons. The length of the last seven recessions varied, from just two months in 2020 to 18 months during the 2008 global financial crisis. Of course, recent experiences do not preclude a longer recession.

• Investing defies certainty. We don’t know how long any recession may last or how long equity market recoveries may take. Indeed, official declarations of recessions by NBER are backward-looking. A recession can end before it’s been declared, reflecting the challenge economists face in assessing the level of growth in real time.

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.

Next steps

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.

The information contained in this article is of a general nature only and may not take into account your particular objectives, financial situation or needs. Accordingly, the information should not be used, relied upon or treated as a substitute for personal financial advice. While all care has been taken in the preparation of this article, no warranty is given in respect of the information provided and accordingly, neither Calibre Private Wealth Advisers, its employees or agents shall be liable for any loss (howsoever arising) with respect to decisions or actions taken as a result of you acting upon such information.