Hello everyone. This is Jordan Buffum with Voisard Asset Management Group. Just wanted to put together a quick commentary today on the markets in our economic outlook. If you have read the headlines at all, the headlines are all calling for a recession as we close out the year or a recession in 2023.
A question that we’ve been getting from our clients is, if we’re heading into a recession or if that’s the general consensus, wouldn’t it make more sense to move our funds out of the portfolio and into something safer like cash until we get through a recession? We wanted to put together some thoughts on what that looks like and what our recommendations are. You guys are more than welcome to call your advisor individually and talk about your personal circumstances. In the meantime, we did want to put together a quick commentary on what our thoughts are moving forward.
If you look at year- to-date investment returns as of September 30th, what you’ll see is across the board, regardless of what you invested in, markets are down. US equity markets are down, international stocks are down, fixed income is down, and actually, the only thing positive has been the consumer price index. The consumer price index is really our measurement of inflation, and that’s one of the reasons why the stock and bond markets are down year to date.
The Federal Reserve has been raising interest rates to bring down inflation, and the concern is that they’re going to raise interest rates too far and ultimately push the United States into a recession. What that’s done to consumer sentiment and consumer confidence is we have seen it fall off the cliff. Consumer confidence now sits somewhere around where we were in 2008 and 2009, during the recession crisis that we saw back then.
What we wanted to do is we wanted to bring us back a little bit, take a look at some of the headlines and, and what the economic environment looked like back then, when consumer confidence was this low. When we look at headlines from March of 2009, whether you looked at them from New York Times, CNN, Barron, or LA Times, everybody was producing articles and content that suggested that we are entering another great depression. If you read any one of these articles, you would be led to believe that it would take a good 10 years for the stock market to rebound and that the best thing to do would ultimately be to shift your funds into cash, into something safer to get through this period of time. When we look at what actually happened, all of those articles were written right around March 9th, 2009, which was the bottom of the market. When we fast forward to the end of the year, December 31st, 2009, what you would’ve seen if you stayed invested was that the major equity markets were up anywhere between 60 and 80%, by the end of the year.
Why do we bring up 2008 and 2009, and look at the headlines? We’re really looking at it because it’s not really a unique period of time. When we look at prior crises and prior times when the consumer sentiment index hit an all-time low or a trough in that economic cycle, we see that the next 12 months produce returns on average of 25%. These are the points when consumers are looking at the markets and the economy and saying, this is going to be bad – the next 12 months are going to be horrible. When you look at periods of time like that, the next 12 months produced average returns of +25%. So pretty good returns to stay invested. When you look at the peaks, which is where consumers are looking at the market and saying things can’t get any better. We’re seeing great economic growth and we think it’s going to continue. The S&P 500 only returned 4% on average over the next 12 months. When you look at rates of return and when rates of return are better, on average, they’re better after we get to the troughs in consumer sentiment. Now we don’t know whether this is a trough or not. We don’t know if the new trough is going to be in a couple of months, but what we do know is we’re certainly much closer to a trough than we are at a peak, which is starting to suggest that we’ll see stronger than average returns in the future.
What does it mean if we enter a recession? We have a summary here of the last 12 recessions that the United States went through and what I want to direct your attention to is this period of time that’s titled “During the Recession”. When you actually look at the recessionary time periods, what you’ll see over the last 12 recessions is that six of those recessions produced positive returns when we were in the recession, and six of them produced negative returns. That can seem counterintuitive to a lot of people. How can the market be positive during a recession? Well, at some point in every recession, the market starts to see the light at the end of the tunnel and say, “Okay, I think we may have oversold.” I think the economic conditions are going to improve in the future, and because the market is anticipatory and because it’s anticipating, what you often will see is you’ll see economic data getting worse and the market rising at the same time as it anticipates an exit.
Further, when you look at the 1, 3, 5, and 10-year returns after exiting a recession, what you see is a huge block of green. It certainly varies from recession to recession on what those returns have looked like. But if we just looked at averages of the last 12, the average one-year return after a recession in the S&P 500 is +21%. In three years, it’s almost +50%. In five years, the average is almost a hundred percent return, and in 10 years the average is 250% in a positive return. Over the long haul and regardless of the recession that we’re talking about, it has paid for people to stay invested and to get those returns as the economy has exited a recession. That brings us to our point: What has this looked like for people that have moved in and out of the market? There’s been plenty of studies that have been done but this one here that we’re looking at shows over the last 20 years. Starting at 2021 and going back to 2002, the average return for the S&P 500 was 9.5% each year. The average return for a blended portfolio of 60% stocks and 40% bonds has been 7.4%, and yet the average investor is sitting over here at 3.6%.
The reason is that investors are always choosing the wrong time to enter the market and the wrong time to exit the market. They’re wanting to exit the market after we’re seeing a market correction or when values are low and saying something to the tune of, well, I’m going to wait until I feel better, or until things look better, and then I’ll get back in. I’ll reinvest my funds. Well, the problem is that because the market is anticipatory, by the time you feel better about the economy, by the time you feel better about the outlook, what you see is the markets already rebounded and you’re stuck at a point where you’ve sold at a low point. You’re buying at a high point only to repeat the next time we see a market pullback or recession. That has cost investors a lot of money. I wish I could just say that it was average investors only and not people that had financial advisors.
The story remains true for those that have had financial advisors and decided to make the same movements in their portfolios. People that move the market are generally doing so at the wrong time. They’re picking the wrong time to get back in. We know that the individuals that stay invested, that stick to their allocation, wade through the recession and look back on the other side, see nice, strong, positive returns. So that’s our thoughts on the current market environment and on what things look like if we go through a recession.
Again, we are certainly happy to talk with you in more detail, so please feel free
to reach out to us if you do have any questions or concerns