Last week we had a meeting with one of our investment partners and were handed an internal marketing item that we found rather interesting. It discussed a topic that’s on everyone's mind – when will the next recession start. What we liked about this marketing piece was that rather than picking a specific date or giving you a list of potential issues, it examined what a recession is and provided information to guide investors through the later stages of this current economic cycle and eventually through a recession.
Within the PDF, there are three pages that I would like to highlight: “What is a recession?”; “How long do recessions last?”; and “What happens to the stock market during a recession?”. The “What is a recession?” page does a good job explaining what a recession is and how certain economic metrics indicate where an economy is in the business cycle. The graph does a nice job visually showing the relative size of each economy by GDP as well as where each country is positioned in the business cycle.
On the following page, the authors speak about how long recessions typically last. Recessions are interesting from a behavioral finance standpoint: they occur over a very short period of time and the magnitude of the decline is so intense that investors seem to forget all of the good years prior. This recency bias colors investors’ perceptions, impacting their investment decision making. After the great recession, many investors were reluctant to get back into the markets even though the markets were performing well. The key thing to remember is that recessions are short. Since 1950, there have been 10 business cycles and, on average, each recession only lasts 11 months. Lastly, there is a big difference between the stock market and the current economic cycle. While they both tend to move in a similar fashion, the peak of the market comes about 8 months earlier than the peak of the economic cycle.
What these graphs collectively show is that we are not yet in a recession but we are in the late stages of this cycle. Typically, the equity market will peak before the actual recession occurs. When recessions occur, they tend to happen quite quickly. Because it is incredibly difficult to time the market perfectly, it is critical to have a clearly defined portfolio management discipline that is executed consistently. That is why we are committed to regularly rebalancing our portfolios. This enables us to take profits when equities outperform and shift the proceeds into high quality fixed income. As we move through these late stages of the cycle, we want to ensure that your capital is protected from the downside so that you can rest easy that your wealth is taken care of.
Please click here to read the full marketing piece.