Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Q
Investing During a Recession

Jun 8, 2022

In 2021, everyone was a professional investor. Uber drivers had hot stock tips; anonymous Twitter profiles dolled out crypto takes, chants of “stocks only go up” reverberated through high school hallways, meme stocks became a thing, etc. Unfortunately, I couldn't convince many people that diversification was important over the long run, as a concentration in growth stocks proved to be a favorable strategy. In the chart below, you can see the performance of NASDAQ vs. a 60/40 portfolio from the bottom of 2020 through the end of 2021.

The narrative and general culture of stock picking with little risk mitigation have since changed course rather dramatically in 2022. As shown in the table below, while the NASDAQ is down 30% from its one-year high, the average stock in the index is down 51%. The tiny Roblox position I set up for my 13-year-old son in a brokerage account is not panning out well, down 65% from its all-time high.

Another sobering table below shows how far darling stocks of recent memory have fallen sharply. It's attractive to try and catch a falling knife when there is only one knife falling, but when it's raining knives – that's another story.

Suffice to say, the Uber driver giving investment advice community has quieted considerably.
 
Over the weekend, famed rapper, Cardi B, posed a question on Twitter which caused many investors to joke that we must be at the bottom.
But the truth is that nearly every major survey you can find states that most people believe we are currently in a recession. Republicans tend to believe it much more than Democrats, but either way, most of both parties report that we are currently in a recession. Finally, something we can all agree on! Well, not quite.
 
I think most people believe we are in a recession because inflation is at a 40-year high. With gas and food prices where they are, it's hard to argue with that line of thought. However, the counter to that is the unemployment rate is at 3.6%. Consumer spending is still outpacing consensus expectations. Wages continue to increase, and an additional 1.2 million jobs were added to the U.S. economy in the past three months!
 
It's important to note that if we are currently in a recession, the reporting agency that makes it official, the National Bureau of Economic Research (NBER), purposefully does not do so until months after. That's a feature, not a flaw, as much of our economic data lags and is not reported in real-time like the stock market is. Here is their definition of a recession:
 
The NBER's traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee's view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.
 
The question is, what has been the experience been like for investors during a recession? Our friend Ben Carlson put together the table below, which outlines the S&P 500's performance in the six months leading up to every recession since WWII, as well as during the recession and following it.
Here are Ben's comments on the table that I thought was fantastic:
               “The problem here is twofold:
(1) Predicting the timing of a recession is hard to do.
(2) Predicting how and when the stock market will react to a recession is also hard to do.
You could nail the timing of the recession but completely whiff on the bottom of the stock market.
It's important to remember even if you knew the exact start and end dates of the next recession, it wouldn't necessarily help you in determining the path of the stock market in the meantime.
Timing the economy is hard.
Timing the stock market is harder.”

What Does This Mean to Me?

The growth strategies that created investor exuberance are no longer found in the marketplace today. Instead, they have been replaced with confirmation of contraction, even in pop culture. While the current stock market correction and economic change have caused many to attempt to time the market and the economy, this is an easier thing to say than to do, as historical data shows that the two are not always tightly correlated. What is most important for investors to consider at this point is whether their portfolio meets the needs of their short, mid, and long-term financial plan. Where can risk be added, and where should it be removed to meet the highest probability of achieving those goals? Having a partner to work through those questions can save you time and wealth. We'd love to help, just give us a call!

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