I thought I’d send out a short (kind of) message before 2Q22 ends. Just a quick question for you: “Has the economy and markets got you rattled?"
Yes, me too. It’s enough to rattle anyone. There are some serious concerns in the world and the economy right now. Here are just a few:
- Inflation: At its highest level since 1981
- Prices: Escalating costs for food, gas, and just about everything
- The Fed: In efforts to fight inflation is raising interest rates
- Supply chain issues: Massive back orders on many products
- War: Russia invading Ukraine has caused huge ripple effects
- Media: The news outlets love to sensationalize, and many are saying we’re going into a bear market and a recession is on its way
More than ever, I realize the need to be in communication with you and let you know my thoughts on the state of affairs. As you open your account statements or look at them online, you may see your account values have declined in value. This is never fun and nearly always scary. I was visiting with an associate the other day and we agreed our profession is much more fun when the markets and economy are booming. Yet, we make a bigger difference with our clients when things are challenging.
The prevailing question haunts many: “Will I have enough money left to retire?” This is a very valid question – especially for those withdrawing income while the markets are declining.
On top of these issues, the word “Recession” is being thrown around by most media outlets, causing some to worry even more. To refresh your memory:
What is a Recession? This is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP for two successive quarters.
What is GDP? This stands for Gross Domestic Product and is the monetary value of all goods and services produced in a country in a given period.
In short, a Recession is when the total of all goods and services produced in a country is shrinking (becoming less) for six months in a row, i.e., a six-month slow-down of economic activity.
People hear Recession and nearly always equate it with a crash in the markets. However, this is not necessarily the case. During an economic slow-down, markets don’t always do poorly. Click on the link below to generate a table which shows how the S&P 500 market Index performed before, during and after the past 12 U.S. recessions, back to 1948.
Source: Bloomberg, NBER. As of 5/31/2022. Past performance is no guarantee of future results. This chart is for illustrative purposes only and not indicative of any actual investment. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Index returns shown are total returns.
You can see the only Recession in the past 75 years with a significant (double-digit) market decline was during the 2007-2009 “Great Recession.” All but 2001 the market had a strong rebound of 11% (1991) to 45.96% (2020) during the following year.
We are currently not in a Recession – although everyone seems to be predicting it. But if GDP does end up dipping into recession territory, don’t panic. It doesn’t spell doom for your investments.
As you can see from the chart, the following 1, 3, 5 and 10 years following a recession, your account values would have recovered and grown. You merely needed to stay invested. Pulling out at the wrong time can be very costly.
What should we expect going forward?
I learned early in my career never to try and predict the future. But here is what I know, and other people much smarter than me believe, about the markets and the economy:
- Unemployment continues to be very low. In fact, jobless claims are the lowest they have been since 1968
- Jobless claims typically spike higher before a recession. Today’s low 3.7% unemployment does not signal an imminent recession.
- “Job Sentiment” – which means people think jobs are plentiful – is very high. This tends to boost consumer confidence and spending. This is a positive metric for the economy.
- The GOP is likely to take ground in mid-term elections, with possibly a House majority and a small majority in the Senate. This doesn’t say markets will do well, but a divided government reduces the odds of tax hikes and markets tend to do well under a government gridlock and when government is not controlled by one party.
- Many believe the war in Ukraine will not escalate to WW III. However, uncertainty and worry about this situation will certainly cause market volatility until fully resolved.
- Most of the economic pundits do not believe recession will occur in 2022. The Fed will continue to raise rates and “tighten” the economy, which may eventually lead to a recession, they are saying in latter 2023 or 2024.
- The markets are expected to have slower growth in the near term but could possibly rally into positive territory by year-end. Regardless, investing in the markets has historically created positive returns for investors especially those who continue to invest when the market is down.
In the midst of all this, we are in a mid-term election year. I thought I would include a very nice piece from one of our product providers, First Trust. Click on the link below to open up a their Client Resource piece entitled “MIDTERM ELECTION.” One slide shows mid-term election years provide historically lower returns than non-mid-term years. Another slide shows the low return date during the mid-term year and then the return one year after that low - with each time being positive and almost every year, a significant positive return. Another reason not to panic.
I don’t want to minimize any of your fears or worry. Declines in account values are certainly a concern and I want you to be invested appropriately. This is why I have you in actively managed mutual funds, as the fund managers adjust the underlying holdings in each of the funds. This is also why you and I have account review meetings - to make sure you're still properly and appropriately invested.
If you have concerns and would like to discuss the value of your account or how you are invested, I welcome the conversation. I certainly want you to feel good about your strategy and better yet sleep well each night.
My desire and efforts are to keep your accounts in investments that, over time, will meet the needs of you and your family – whether that be accumulating, preserving, distribution, or a combination of each.
I want to see you reach your goals and I value you and appreciate your business and trust in me, my staff, and my firm.