01/2023 - Recession Risk
Full written article below.
For close to a year, the central question in the financial industry is around a potential recession. “Will we have one or won’t we have a recession?”
I realize I’m going to disappoint a majority of you, when my response is… No one knows if we’re going to have a recession and I’m not quite sure it really matters anyway. What’s more, who’s to say this potential recession isn’t already priced into current equity prices? As well as how will this potential recession impact GDP, Corporate Earnings, and how long will it last? Keep in mind, this is all fully unknowable.
So what am I getting at? To enjoy the historical rise in stock market prices, we have to be able to ride out and even embrace the year to year volatility. If you’re retired and reading this, I realize your circumstance is far different than 20-30 years ago when you were still working. To that end, if you’re a client of Hobbs Wealth Management, your investment allocation is specifically built for your specific income and distributions needs.
With that said, let me review the last three recessions we’ve had since 2000. Sources found here: NBER.org, BLS.gov, BEA.gov, SeekingAlpha.com
2001 | Dot.com and World Trade Center
Duration: 8 months
Unemployment: up to 6.3%
GDP decline: 0.3%
SP 500 market decline, peak to trough: -27%
2007-2009 | Financial Recession
Duration: 18 months
Unemployment: up to 10%
GDP decline: 5.1%
SP 500 market decline, peak to trough -56%
2020 | Covid-19
Duration: 2 months
Unemployment: up to 17.7%%
GDP decline: 19.2%
SP 500 market decline, peak to trough -17%
I don’t see a clear trend, do you? All prior recessions have been temporary, the world hasn’t ended, and equity prices have recovered and climbed higher. There is of course no way to know the future, but assuming the world doesn’t end, my personal assumption is that even if we do have a recession, the market will recover and climb higher just like it has every other time for the past 100 years.
To add to this, here’s a quick video on the past 25 years of the SP 500 compared to CPI, and a Bond index: https://somup.com/c0nVFmxznu
Final point on this, I promise… Since 1952, the SP 500 has returned about 10.7%, but please don’t ever forget how bumpy this ride has been. As you can see from the chart below, just how common and frequent market declines are. Source: CapitalGroup.com
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching. This month’s list of additional data points is really just an update from some of the prior months. I’m looking for continued trends, which at least currently, are continuing.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, who knows if I’m right or wrong, it’ll take another 12-24 months to know for sure. Regardless, since the date cited, the markets are up over 14% (dates from 10/13/22 to 01/31/23 source: Yahoo Finance)
2. BLS.gov – (above chart) showing PPI 12 month percent change, notice the sharp decline, peak was in March 2022.
3. M2 Growth vs Inflation – This is something I’ve been commenting on for close to a year and yes I’ve been in the camp that inflation is tied to M2. We won’t know if I’m right or wrong for another year or so, but I sure like what I keep seeing. Longtermtreands.net – The trend is continuing, lower M2 (black line) is now negative and lower inflation (red line)
4. Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.27% as a reminder, in December 2.33%, November 2.45%, October 2.67%, September 2.14%, August 2.51%, July 2.72%. When you expand the chart to the “Max” history, you’ll notice we’re just about on par with the long-term average.
5. Federal Reserve Balance sheet – The Fed is following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. As I’ve written since the start of 2022, reducing the balance sheet and in turn reducing M2 I believe is a key measure to bringing down inflation. I want to applaud the Fed for following through on this. I’m certainly not thrilled with the balance sheet almost being at 9 trillion dollars last April, but I am thrilled to see this continuing to come down.
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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