Will there be a Recession? May Newsletter
Firm Update: I continue to work towards updating the branding to Hobbs Wealth Advisors. I’ve unfortunately needed to change marketing firms, which has now caused a multi-month delay. Frustrating to say the least. I’m hoping this will be updated by the end of June. As I’ve mentioned before, this is simply a name change from Cedar Wealth Partners (which I was a founding partner). I’ll still be using the same processes used with Cedar Wealth Partners and there is nothing clients will need to do.
Looking for additional commentary? Watch Newsletter for additional information.
Index Update (As of 04/29/2022 from Yahoo Finance)
S&P 500 (Large Cap): -12.99% YTD | +8.98% 20 Year Return
Russell 2000 (Mid, Small Cap): -16.69% YTD | +8.12% 20 Year Return
Global Market – ex US: -11.35% YTD | +6.73% 20 Year Return
Recessions: Every day there’s a new headline regarding recession fears. Everyday, you and I have to remind ourselves of the “normalcy” of recessions and have to embrace the inherent volatility that comes with the stock market. We also must remind ourselves that the volatile stock market has historically been one of the best ways to get your money to work for you.
Today’s headlines imply that the Federal Reserve is going to increase interest rates too much and will cause a recession. We all know recessions are bad, no one likes losing money.
But let me talk about this for a moment. You don’t want high inflation. If inflation is 7%, that requires at least 7% returns just to break even! And I’m not even talking about taxes that would need to be paid on your 7% gain.
The cure to lowering inflation is to cut the Federal Reserve’s balance sheet and increase interest rates, the market calls this processing “tightening.” The tightening process of lowering inflation is not going to be fun or painless, but it is going to be better than long-term rampant inflation.
Yes, the market has felt and will probably continue to feel this Fed tightening process.
With that in mind, a common question I receive is, “shouldn’t we go to cash?” My answer is always “No.” The market has always, and my guess, will always be volatile. However, my personal view is that unless the world ends, the Global Economy will continue its progress and advance. Which in turn has historically created higher stock market prices that we’ve all enjoyed over the years. Specifically, since January 2020-April 2022, the total return of the S&P 500 with dividends reinvested has been just under 30%. This of course includes the Covid recession and the current market downturn.
If we “go to cash” this of course implies that we are 100% sure a recession is going to happen, which we of course cannot know. Additionally since the 1950s, the S&P 500 has risen an average of 9.4% during the 12 Federal Reserve interest rate increases (Truist Graph). This one data point is sure to surprise most.
Graph showing declines during each year in the SP 500 and ending growth
Let’s not lose sight of additional history. Between January – December, the AVERAGE market decline since 1952 is -13.7% (Source: American Funds). What’s more, just since 1972 the S&P 500 has been cut in half three times.
January 1973-October 1974 -48%
March 2000-October 2002 -49%
October 2007-March 2009 -57%
HOWEVER … the average market return since 1952 is over +11% with dividends reinvested (source)
My point… we’ll never know the future, only God does. Unless you think the world is going to end, my encouragement is to stick to your long-term financial plan and stay invested.
If you’re a client and you aren’t 100% confident in your plan, please reach out to me immediately.
If you’re not a client and you want to work towards building a plan you have confidence in, please contact me.
Additional Data: Each month I get asked by clients what additional resources I’d encourage reading. This month I have three.
Inflation – Hillsdale.edu – Concise and incredibly educational history of inflation
Reasons to not invest - JP Morgan
Dividends and Buy-Backs - FT Portfolios
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.
-Dave
Cedar Wealth’s Facebook | Cedar’s YouTube Channel
David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
Schedule a MEETING
Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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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An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
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