After a strong, albeit brief, summer market rally, we once again we find ourselves in the midst of bear market with major indices right around their lows. Many of the concerns that plagued the market earlier this year remain, with war in Ukraine, persistently high inflation, interest rate increases and the ever-increasing likelihood of a recession. While none of these items brings comfort, there have been some improvements since June, which unfortunately don’t get much press, with fewer port delays, declining ocean freight costs and significant reductions in gas prices (over 25% lower since mid-June) as well as other commodities.
So what does all of this mean? At the moment, it appears the main concern in the market is that the Federal Reserve (Fed) is going to go too far in their effort to rein in inflation. If this happens, many believe it could lead to a recession. While a recession sounds scary, the impact on individuals, families, corporations, and financial markets will depend on how deep the recession is, how long it lasts and how the Fed reacts among other things. Additionally, remember that financial markets are forward looking, meaning all available information is being used to price these risks in as quickly as possible.
Looking at recessions since WWII, we can get an understanding of how the market has performed during these times and how these risks have been priced in. If you focus on the column at the far right, you can see the performance during recession periods. Interestingly, and also somewhat hard to believe, the average performance during these recession periods is very close to zero (and the median is actually positive). While there is high variability in the data and every period was different, this goes to show that the market usually declines as it anticipates the event, and generally less so once the event has arrived. Lastly, it is worth noting that when the market finally reaches a bottom, the returns over the next-twelve-months (NTM) are particularly strong. And while no one can predict when that will be, using history as our guide, hopefully we can look forward to brighter days ahead.
We know these are not easy times, but we hope this gives you helpful information and a frame of reference for where we find ourselves today. As we’ve said in the past, while these are the times when it is most difficult to stay the course, focusing on your long-term plan and making sound decisions will give you the greatest chance for success.