Timing is Everything, or is it?

ince Jerome Powell, Federal Reserve Chairman, announced early 2022 the Federal Open Market Committee (FOMC) rate hike campaign to slow inflation, analysts have predicted a recession in 2023. Recessions do not suddenly sneak up on society and suddenly the US is in a recession. Recessions are the product of months or quarters of a continued economic slowing until eventually the net growth of the economy, as tracked by changes in the national Gross Domestic Production (GDP), turn negative. Two quarters of negative GDP changes is the official designation that the economy is in a recession.

As we have discussed, economic fluctuations are normal, and if we enter a recession, it is not a reason to panic. In fact, once the official designation that the US economy is in a recession it’s probably over or on the recovery.

As detailed below, every recession is unique, with varying lengths and severities. Putting recessions in context, in the past we have come through each slowdown, and the trajectory of the U.S. economy over time has been positive.

The typical business cycle has four phases: expansion, peak, contraction, and trough. As unpleasant as they can be—especially for those who lose their jobs or businesses—recessions are not an uncommon part of the business cycle. In fact, the U.S. economy has weathered through 13 recessions since World War II. These downturns have ranged from long and deep to short and shallow. On average, America’s post-war recessions have lasted 10 months, while expansions have lasted for 57 months.

In the accompanying illustration, you can see how stock prices have reacted before, during, and after each of the 13 recessions. Since 1950, stock prices have anticipated recessions, dropped during them, and started to rise before their ending. However, keep in mind that past performance is no guarantee of future returns.

More specifically, the illustration shows that stocks dropped by an average of 4% in the year before each recession. During the recession itself, the stocks fell about 20% before entering the
recovery phase and trending higher.

From our conversations, you know that trying to time recessions or markets is impossible. Making major portfolio moves in anticipation of a slowdown is difficult, even for professional investors. This is especially true if basing investment strategy on trailing indicators like GDP growth or contraction. The stats for the GDP are typically months behind and the official announcement that the US is in a recession is usually so late that the economy may actually be entering the next growth cycle or well on its way.

What Does This Mean to Me?

A slow down of the US economy is certainly expected after the Federal Reserve bumped their Discount Rate today for the 10th time to 5.0% to 5.25%. There are many industries that have been impacted by the aggressive rate hike policy including real estate, credit markets, and most recently banks. However, last year’s worst doom and gloom projections of a deep recession don’t seem to be materializing.

Today, the stock market opened positive but turned negative after Jerome Powell’s remarks. However, we thought the Chairman’s comments were encouraging and offered reasons for investors to be optimistic. The most positive aspect of today’s highly anticipated rate hike of 0.25% was that the post-meeting statement from the Central Bank omitted a key sentence from March’s comments. The omitted statement was: “the Committee anticipates that some additional policy firming may be appropriate”.

In other words, this statement in every post-committee notes was the very clear statement that the FOMC will most likely vote to raise rates at next meeting. The omission of this key sentence now leaves open the possibility that the committee may not raise rates at the next meeting. Investors should celebrate that after 14 months those rate hikes may be over. The omission of this sentence would strongly indicate that indeed the Federal Reserve will be pausing future rate hikes indefinitely.

This of course should be no surprise to anyone listening to Jerome Powell’s comments. He and the committee have been very clear of their goals, objectives, and process to slow inflation. Now
the committee’s plan is to let the impact of the new “new” base line of interest rate assimilate through the economy. If the rate hike campaign slows the economy too much, then the Federal Reserve now has room to adjust the rate down.

We maintain our favorable view of the US economy and stock market. If you have any questions, please do not hesitate to contact us. We are always here for you.