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You better watch out, You better not hide

You better watch out, You better not hide

December 05, 2023

In the beginning of 2023, it seemed like every analyst, economist, and market commentator was predicting a recession. Well, this far it looks like they were all wrong in 2023. But who could blame them? Not many were predicting double digit earnings in the market this year, and no one I heard expected rates to jump from 0% to 5% over the last two years. Which leads a lot of people to wonder:

Are we now entering a recession?
And if we are, what's going to happen to the market?
Should we move to cash?

With Money Markets paying between 4.50%-5.00% right now 2, it's easy wonder if you should be cashing out your investments and real estate and move to cash. The prospect of doing so is particularly heightened when the risk of a recession is on the horizon. But over time, we have tons of research's that shows that stock prices incorporate the general risk expectations of a recession and bake the recession into the value before the recession is actually announced. 

Per Dimensional (DFA) in their post "Long-Term Investors, Don't Let a Recession Faze You: 

Across the two years that follow a recession’s onset, equities have a history of positive performance. Data covering the past century’s 16 US recessions show that investors tended to be rewarded for sticking with stocks. In 12 of the 16 instances, or 75% of the time, returns on stocks were positive two years after a recession began (see Exhibit 1). The average annualized market return for the two years following a recession’s start was 8.8%. Looked at another way, a $10,000 investment at the peak of the business cycle would have grown to $12,145 after two years on average. 

It's easy to understand why using the "R" work worries people. I get it. I work with retirees and people who are planning toward retirement every day. That's what we do.

But history has proven that a positive outcome comes usually follow recessions. 

So, as we say, "plan first, invest second". Make decisions on how to build your portfolio that will last if there is a recession. That's the long-term planning we like to talk about.

Disclosures:

  1. Exhibit 1 Graph/Image credit to Dimensional Funds Advisors LP: Long-Term Investors, Don't Let a Recession Faze You
  2. https://time.com/personal-finance/article/best-money-market-accounts


In USD. Performance includes reinvestment of dividends and capital gains. The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.

Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant recession start date. Sample includes 16 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to February 2020. NBER defines recessions as starting at the peak of a business cycle.

Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.