This was a joke (economists are not known for their humor) from decades ago regarding the relationship between stocks and the economy. Samuelson’s implication was that the stock market has a historical tendency to be overly pessimistic about the economic outlook.
Given the bear market in stocks we’ve been in, fears of an impending recession have taken the front seat on the worry bus. I thought this quarter would be a good time to address the “R word” and hopefully calm your nerves over what it could mean for your investments.
A recession is technically defined as: A period of temporary economic decline during which trade and economic activity are reduced, generally identified by a fall in Gross Domestic Product (GDP) for two quarters.
Considerable debate exists as to whether the U.S. economy has in fact already entered a recession. The economic numbers are mixed. However, if we are in a recession, it feels unlike any I’ve experienced in my thirty-five years in the financial services industry. If you travel or go out to dinner much, you know what I’m talking about!
Our mainstream media has never seen a recession signal it didn’t love, and if there is none to be found, they will create one to scare us. Remember, this is their job, and the U.S. media is remarkably good at it. My current favorite media tactic is to interpret a slowdown in a data point as being “negative.” That isn’t the way math works. Until a number falls below zero, it is still positive. When overall economic growth slows from 2% to 1%, it is still growing, just not as fast. I have lost count of the number of times I’ve heard a so-called expert tell me that the next recession is right around the corner. As it has so many times, the U.S. economy continues to show resiliency and confound the experts. As Mark and I continue to believe, math wins, and data prevails over narratives and opinions.
The U.S. economy has undoubtably slowed down, and at some point, we will have a recession. Mark says this feels like the most widely anticipated recession he ever remembers, and I agree. The economy generally lags the stock market by seven to nine months. This disconnect, or time lag, is one of the factors making investing successfully so difficult. Stocks can fall when the economy is still strong, and then rally when the fundamentals are deteriorating.
“The stock market has predicted nine of the past five recessions.”THE
I could give several examples, but the most recent and powerful was March of 2009. We were deep into the Great Recession which had started in late 2007. The unemployment rate was over 10% and economic activity had almost come to a complete stand still. On March 9, seemingly out of nowhere and for no reason, the stock market turned around. No one flashed a sign or rang a bell, but stocks went almost straight higher for a decade.
This is how bear markets have always ended, and we believe it will happen again. I wish we could predict exactly how and when. After so many months of negative statements, it’s tempting and completely understandable to want to sell stocks until we feel better. The problem is that by the time we feel better about the economy, the stock market train will have left the station. This means we will miss most or even all the rebound.
Our hope is that we can avoid a recession, but the Federal Reserve’s aggressive rate increases are making this unlikely. I’m afraid at this point the best we can hope for is a mild recession with a soft economic landing.
Recessions, like bear markets, are an ugly element of our economic system. They cause job losses, dislocation, and general economic pain. The U.S. has seen eight recessions since 1980, and we will suffer through more in the future.
Every recession varies in length and depth, but all recessions tend to put
many unprepared or marginally profitable companies out of business. Ultimately the companies who survive will thrive as the economy recovers. This is one of the main reasons we always recommend owning the highest quality investments and will continue to do so.
March 18, 2019
Martin & Marsha Lynch 43347 Nebel Trl Clinton Twp MI 48038-2465
It’s also worth noting that the past couple years have been highly unusual in the U.S. and around the world. The pandemic government response was unprecedented (overused word, but true in this case) monetary and fiscal stimulus. What we are experiencing now, especially inflation, might be considered a hangover from so much money flooding the system so quickly. It’s possible that we are moving toward more normal market and economic conditions, where asset prices are based on fundamentals and not speculation and ultra-low interest rates. The transition might not be much fun, but it could lead to a stronger and more stable financial system.
Dear Martin & Marsha:
I love sending WorthWhile magazine mix of cultural, financial and latest edition of Raymond James’
The Spring edition takes us guide for surviving in just about planning. Many of my friends tell me everyone, and I believe there thoughts when you can. I always
I want to end my section this quarter with some timely words of wisdom I heard from one of our clients. We were having coffee on her front porch, and I asked her if there was one piece of life advice she had for me after her 98 years on earth. She thought for just a minute and replied, “Everything changes, and this too shall pass.”
Sincerely,
Jeffrey Brayton Financial Advisor ManagerI hope you are enjoying your autumn. For those in Michigan, I can’t think of a better place to be. It’s a season full of hot cider and donuts, high school football and the changing of colors everywhere you look. This season also brings with it a midterm election that promises to be hard fought and more intense as we inch closer to November 8.
As many of you know, Jeff and I continue to give minimal weight to political outcomes and their impact on market performance over the long term. We have plenty of data
sources to support this philosophy. However, we do recognize elections can and do have an impact on the markets in the shorter term. We also recognize it’s not so much the outcome of the election, but rather that the election happened. Election results, once known, take away uncertainty. What the stock market dislikes
I recently came across this chart from Bloomberg. It illustrates data of the S&P 500 Index performance before and after each of the previous 15 midterm elections, dating back to 1962. On the left side you see the different combination of sitting presidents at the time and then seats gained or lost (mostly lost) from the midterm election. On average the sitting presidential party loses 23 seats in the House and three seats in the Senate. You’ll notice, however, no consistency when it comes to the color of red or blue change that occurs.
Consistency can be seen starting on the right side of the chart. The data shows S&P 500 Index performance after each midterm election period and is broken down by threemonth, six-month and 12-month periods. At the bottom of each respective column, the midterm average shows performance returns of 7.3%, 15.1% and 16.3%. More importantly, when looking at the six-month and 12-month data points from each year,
you won’t find a single negative return. This strongly supports the argument that it is most important that the results are known, not which party gains.
As much as Jeff and I would love to guarantee history will repeat itself, we can’t. Every election cycle is different, and there are many complex issues to be considered. However, we are certainly encouraged by the data supporting a potential rebound in the markets following what has been an interesting political season.
I’m embarrassed to say I had never heard of John von Neumann. After reading this book, it’s hard to imagine why he isn’t as famous as physicists like Albert Einstein or Robert Oppenheimer.
“The Man from the Future: The Visionary Life of John von Neumann” by Ananyo Bhattacharya
The biggest news from our office this fall: Tina and Mark completed the Detroit Free Press Marathon in mid-October. Tina ran the full 26.2 miles, while Mark finished the half 13.1 miles. I’m fortunate to have a front row view of the mental and physical preparation required for this milestone event. Needless to say, it’s a great accomplishment and speaks to Tina and Mark’s discipline and work ethic.
We were proud to sponsor the Miracle League of Plymouth fall season this year. Miracle League baseball is played on specially designed rubberized turf fields that accommodate wheelchairs and other medical devices for children with mental and physical disabilities. I attended the opening game of the season, and I couldn’t think of a better way to spend a couple hours than watching the laughter and smiles of the players and parents. My daughter Danielle has been involved in teaching and helping children with autism, and she had the honor of throwing out the first pitch.
We hope that you will join us on Thursday, December 8 for our annual party at Assumption. Thank you for taking the time to read our newsletter and for your continued trust and confidence.
Jeff, Mark, Tina, Pat & Brennan
