Recessions & Rebounds

Source: Blackrock

With the Fed raising rates and the stock market declining, we’ve had a lot of clients ask the same two part question.  1) Are we going into a recession; and 2) Shouldn’t we sell some stocks in case the market keeps going down?

Fortunately, both are answered by the same chart above.

Are we going into a recession?

Maybe.  You will often hear a recession defined as two consecutive quarters of negative GDP but that isn’t always the case.  As this chart points out, not all consecutive quarters of negative GDP are recessions and not all recessions have consecutive quarters of negative GDP.  So, while the good folks at the National Bureau of Economic Research may declare this current period an official recession, they may not.  It is up to them.    

Shouldn’t we sell some stocks in case the market keeps going down? 

No.  The problem with trying to time a recession is that the market typically goes down before the recession begins, starts going back up before it ends, AND they don't tell you it happened until long after the situation has passed. 

While everyone is worried about the downside of a recession, it is important to remember the upside - some of the best stock market returns have happened in the twelve months following a recession.  Looking at the same chart above, since 1947, the S&P 500 Index has averaged 22.5% returns in the year after a recession. __

The stock market has already fallen.  Selling now doesn't change that truth, it simply locks in the losses and makes it much more likely that you will be sitting in cash during the market’s eventual rebound (whenever that may be).  As long-term investors, we need to remember we own a portfolio of great companies that are doing great things, and missing out on the upside is a MUCH bigger risk than staying exposed to whatever happens in the short run.