03/2025 - When’s the Next Recession?
Full written article below with sources.
Disclaimer: Because of the increased regulation and compliance in the financial industry, I want to start with saying everything in this newsletter is based on my opinion and is not predictive in any way.
I don’t know about you, but it seems there’s a growing amount of eye-catching news headlines. The most consistent question I’m receiving from clients is around the idea of a market pull-back, recession, down-turn, etc..
When using history as a guide, we’ve experienced 11 recessions since 1950, source. This averages out to roughly one recession every seven years, with an average duration of 10 months. This is a great example of how averages can be mis-leading. For example, there were two recessions in the early 1980s, and no recessions in the 2010s. Don’t forget about the recession that wasn’t, the 2022 recession that never happened.
Trying to predict the next recession—be it caused by government policy, Federal Reserve actions, financial crises, global events, or, well, even a change in consumer habits—is a challenge I believe defies consistent prediction.
When the next recession occurs, I’m guessing someone out there will have predicted it right. We've seen this play out with those who “predicted” the 2008 financial crisis. They've often spent the subsequent years attempting to replicate that success, or should we call it luck, forecasting downturns that haven't come to pass.
Trying to time the market based has shown to be a fool’s errand. Even if you were to get it right once, the question becomes, what's your exit strategy? When do you re-enter the market? And what if you're wrong?
Peter Lynch, the former manager of the Fidelity Magellan fund has quote: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves” – another one from him - "If timing the market is such a great strategy, why haven't we seen the names of any market timers at the top of the Forbes list of richest Americans?"
A correction or market downturn is always possible, even without a full-blown recession. However, relying on macro indicators to time the market is a strategy I find unreliable. Consistent success in this arena is, in my view, unattainable.
So what are we all to do? My encouragement is to continually revisit your long-term financial plan, then design an investment strategy that aligns with your long-term plan. Notice how this investment strategy doesn’t say anything about investing in good or bad times. Heck, have you ever met anyone who said their wealth is from predicting the market? I haven’t.
Ah – but there’s a market opportunity to take advantage of, this is the time-test strategy of rebalancing a diversified portfolio. Which if you’re a client of Hobbs Wealth happens regularly for you. I want to stress the words I chose… rebalance and diversified. You see, too often I’ll review outside portfolios with numerous different funds, but when I drill down into the funds, they seem to have almost the same underlying holdings. So tell me, if I’m invested in two funds, but the companies in these funds are almost identical, do I really have diversification? I think not. A situation like this minimizes the value of rebalancing because there is hardly anything different between the funds. This is just one of the important parts of investment portfolio construction.
In closing – in my view, the market is unpredictable. The only way to capture the long-term returns the broader market has produced is to ride out the regular and frequent market declines.
Last data point is a chart I’ve shown numerous times before – it’s shows the regularity of market declines. I share this frequently because historically, the broader market moves in two directions. Just because 2023 and 2024 moved higher, don’t be surprised when the market moves lower.
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.
- S&P 500 Concentration – This idea isn’t new in my newsletter, I actually wrote about it last month, here’s the blog post if interested. But what I do find interesting is just the reality that the other 490 companies in the S&P 500 make up 62% of the index. Kind of wild to think about.
- Is a Stock or Bond Portfolio Better? – I always find this chart to be interesting. If you look closely, you can see that depending on the length of time, the historical portfolio allocation winner becomes clear.
Click on the link for full disclosures - https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/guide-to-the-markets/
- Trillions in Money Markets – At it’s highest level ever reported, there’s now 6.8T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 2.59%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – The Fed continues to follow through on it’s statement of reducing the balance sheet. We’re now down to $6.8T dollars in the balance sheet, last time we saw this was May 2020 levels and declining. Historically, the Fed’s balance sheet has been a good measure of Money Supply in this country which is typically tied to inflation.
- Debt Interest Payments – Most in this country would agree that the Federal Debt is just too high, but did you realize that the interest payments on this debt is now over 1.1 trillion a year? What should we do about it? My guess is we should balance the government budget…. But no one is asking me. What’s more, there’s about 3 Trillion in debt to be reissued in 2025 and the broad assumption is that the new interest rates will be quite a bit higher on the reissued debt. So what will this mean? It’ll likely mean even a greater about of debt interest payments.
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, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
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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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