Planning for the Inevitable
A recession is coming in 2023. Or so it seems. Many economists are forecasting the possibility of a recession in 2023 at 100%.
To prepare, corporate America is laying off workers in droves. CNN, AMC, and DoorDash all announced major job cuts just this week. Amazon, Meta (fka Facebook), DocuSign, Snapchat, and Lyft are among a growing number of companies who recently reduced staff or intend to reduce soon.
To understand at least part of the motivation, look at the chart below. Returns from this group of companies so far in 2022 have been lackluster to say the least. Four companies (META, DOCU, LYFT, and SNAP) have lost between 67% and 80% of their value this year alone. The S&P 500, by contrast, is down about 16%.
According to MarketWatch, tech companies alone have announced 60,000 job cuts (and counting) in 2022.
As individual investors, what can we do to prepare?
Some folks wonder if making portfolio changes in anticipation of a recession makes sense. Maybe, but probably not for the reasons you’re thinking, at least in my opinion.
Let’s first take a quick look at how the U.S. stock market has performed during recessions, using the National Bureau of Economic Research’s definition of a recession.
It probably isn’t surprising to see stocks perform best when the economy is growing and poorly during recessions. The average monthly return during recessions is just 0.20% compared to 0.83% during months when the economy is not in recession. Volatility also spikes in recessions which can add to the emotional rollercoaster.
It would make sense for returns in the beginning stages of a recession to be poor. Those periods are often characterized by high degrees of uncertainty and stocks generally don’t perform well when probability of a “worst-case scenario” is uncomfortably higher than 0%.
Since 1950, the first three months of recessions have indeed been tough for stock investors. Imagine someone had the worst conceivable timing and only owned stocks during those first three months of the recession. That individual would have lost 30% of their money. Not great!
On the flip side, it would make just as much sense for the stock market to perform better toward the end of recessions. Investors anticipate more favorable economic backdrops and a turning in sentiment. Paired with cheaper valuations and the stage could be set for strong future returns.
The data supports this as well. Someone with impeccable timing who only owned stocks during the last three months of recessions since 1950 would have gained 164%!
What’s my point in sharing this data? It’s not to tempt people into timing the market. The starting and finishing lines are terribly blurry in advance. It isn’t enough to know a recession is coming. A successful forecast also must include the correct timing. Short of knowing exactly when the recessions are going to begin and end, I believe most people would be better served focusing on things within their control. Earlier, I said it might make sense to make portfolio changes. Here are a few of the reasons that make sense to me:
Reinforce emergency savings. Make time to add up typical monthly expenses. Dual income families should consider having three months of spending on hand, and single income households should aim for a six-month cushion. Secondarily, understand how safe and liquid these funds are. An emergency fund shouldn’t also double as a sports betting kiddy or petty cash. Returns on cash are considerably more attractive than years past, too, which could be another good reason to look at savings again.
Revisit your goals. What do you hope to accomplish and when? We believe long-term goals deserve long-term investment portfolios, and near-term goals deserve portfolios designed to deliver greater peace of mind. That shouldn’t change based on any 6- or 12-month economic forecast. If your asset allocation does not align with what you hope to accomplish, there’s no time like the present to revisit what you own and why.
Consider additional investment if your situation allows for it. You’ve probably heard buying low works well over long periods, and that’s because it’s true. This time, it’s not just stocks that have struggled. Bonds are in a similar boat. We won’t be able know exactly how “low” the market will get during this cycle but having a plan to get idle cash invested systematically may make sense depending on your individual situation.
Even if a recession is coming next year, the timing and severity are still very much up for debate. We typically don’t know official recession dates until well after the fact. And those waiting for an “all-clear” signal are likely to be disappointed. The obvious is only apparent in hindsight.
Interested? Please feel free to reach out to me at eric@diviwealth.com or set up time with the Divvi team to see how we can help.
Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
