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Does it Matter if we go into a Recession?

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This past week, the US Federal Reserve increased interest rates for the last time in 2022 by an expected 0.5%.  Throughout the course of the year, the Fed raised rates 7 times for a cumulative increase of 4.25% or if we want to get a little dramatic, that’s a 17X increase over where rates were to start the year. Now, this last increase was largely expected and should have been priced into market expectations, yet we saw markets decline on the news of the increase and also the sentiment from the Federal Reserve announcement. So why is that?

Well, to start, investors were probably getting a bit ahead of themselves after CPI data from the US came in better than expected early last week which led some to think that maybe… just maybe… the Fed isn’t going to follow through on its plans for higher rate hikes and maybe they won’t have to increase rates by as much as they had originally thought. These thoughts were quickly squashed by the Fed’s chairman, Jerome Powell, who came out and re-confirmed again that they will stick to their guns and squash inflation at any cost. To be completely fair… the Fed hasn’t changed its tune on this and so I’m not quite sure why anyone would think that they would change now. From their point of view, and forgive the football reference, they are in the red zone and they need to stay disciplined and follow through to punch it into the endzone. So, this sent investors into a bit of a sell-off as fears re-emerged that the Federal Reserve would push the US economy into a recession. There it is again, the big bad “R” word which scares investors so much, especially in 2022. Well, I’m here to tell you that whether or not the US, or Canada for that matter, goes into a recession in 2023, from a stock market perspective it doesn’t matter!

Have you ever looked at a long-term stock market chart and tried to pick out when recessions started and ended? Here, give it a try on the chart below of the S&P 500 and see how many you get right. No peaking… I’ll show the same chart with US recessions overlaying the same chart below.

The point of showing you this is really twofold. First of all, you will find that the start and end of a recession does not correlate with the stock market. More often than not, the stock market decline will be experienced before the recession starts. Likewise, markets also tend to begin their recovery before the end of the recession. Additionally, given that the announcement of when a recession starts and ends happens after the event has happened, you cannot wait to hear that a recession is over before you try to invest in the markets. Secondly, if you look at a long enough chart, what you realize is that if you have a long-term outlook, what happens in these short-term periods is almost irrelevant. Even the financial crisis becomes muted in just a 32-year chart as I am showing above. Ok, so here is the same chart with US recessions included:

Now be honest, how many did you get right?

Here’s some more food for thought for you. After markets have seen declines like we have experienced this year, how do things tend to rebound in the coming years? Well here is a chart which illustrates how the S&P 500 has rebounded after declines of 10%, 20% and 30% according to Dimensional Fund Advisors:

Figure 1. FAMA/French Total US Market Research Index Returnshttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_factors.html

To put this into perspective, at points throughout this year the S&P 500 was down over 20% and this has occurred before any announcement of a recession of course. Going back through history, from the point we have experienced this year, the average increases throughout history have been an increase of 22.2% from the bottom in the following year, 41.1% over the next 3 years and 71.8% over the following 5 years.

Here's an additional chart for some food for thought, also provided by Dimensional Fund Advisors:

Figure 2. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1–10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

These are the historical annual returns of the US stock market from 1952-2021. What you should note from this is that the majority of the years are positive, 79% to be exact. You can also see that there are very few years that entered into the ranges we saw this year, which is circled in green. While it’s obviously possible that we could experience a second year of market declines in 2023, the odds are much more in the favor of seeing a positive year.

Of course, I cannot predict the future, nobody can. What I do know is what history has taught me about market movements, and if you are sitting on the sidelines waiting for the recession to end before investing, then you will most likely miss out on either your recovery or your opportunity. Either way, that is a risk that most people cannot afford. So, don’t worry about the recession! Odds are, things will get better before we ever know that we are officially in one.

- Grant White, CIM®,CFP®

Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families. This information has been prepared by Grant White who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth.

The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation tobuy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

 

 

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