Just last week, the news media stoked fears of a recession based on factors such as an inverted yield curve and ISM manufacturing numbers. Yesterday, with news of a China-US meeting in October to address trade issues, everything is great again.
I can’t stress enough – do not base investment decisions or any financial decision on what you read in the paper or see on TV. Today, “news” is just a game to attract viewers for ad dollars. Whether it’s the weather, local news, national news, financial news – they all play the same game to get people to watch. How do you do that? With fear mongering. You don’t hear, “everything is great – stay tuned to find out more.” It’s more like, “rabid dogs are rampaging through the city and you are next – stay tuned after these paid advertisements to find our when they’ll be in your neighborhood.” Fear sells.
Now that I’ve hopefully made that clear, let’s move on.
An economic recession doesn’t necessarily imply a crashing stock market. I’ve heard many individuals over the years worry about a recession when in fact they were worrying about the returns in their investment account. If the US economy enters into a recession, it doesn’t automatically doom the stock market. On the contrary, even if the US economy is expanding this doesn’t mean the stock market will be going up. Equities declined 10% or more in 2018, 2016, 2015, 2011 and 2010 with no recession.
The National Bureau of Economic Research (NBER) is the entity that officially identifies US recessions. However, the NBER always labels the recession after it has occurred by observing data that already transpired. Therefore, watching the news to be told “we are in a recession” in order to make investment decisions based on that is pointless. What you are hearing are opinions and/or guesses. The chart below shows the last 10 official recessions (as labeled by the NBER). If you invested in the S&P 500 from the official start of the recession until the official end based on the NBER, you’d have made money in five of them. In five of the last 10 official recessions the S&P 500 had a positive return. Even if you knew when the recession would occur, is a 50% success rate a great strategy?
NBER data compiled from https://www.nber.org/cycles.html, S&P 500 returns calculated via Stockcharts.com