The Big Picture with Jeff Brayton

“The stock market has predicted nine of the past five recessions.”

Paul Samuelson American Economist

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.

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. 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 March 18, 2019 reasons we always recommend owning the highest quality investments and will Martin & Marsha Lynchcontinue to do so. 43347 Nebel Trl It’s also worth noting that the past couple Clinton Twp MI 48038-2465years have been highly unusual in the U.S. and around the world. The pandemic Dear Martin & Marsha: government response was unprecedented (overused word, but true in this case) monetary and fiscal stimulus. What we I love sending WorthWhile magazine to clients like you who will appreciate the award-winning publication’sare experiencing now, especially inflation, mix of cultural, financial and lifestyle content. I truly value our relationship and believe you’ll enjoy themight be considered a hangover from so much money flooding the system so latest edition of Raymond James’ exclusive magazine – with my compliments, of course.quickly. It’s possible that we are moving toward more normal market and economic The Spring edition takes us on the highs and lows of being a long-term investor and serves as a how-toconditions, where asset prices are based guide for surviving in just about any market cycle. It’s a great refresher on the power of long-term financialon fundamentals and not speculation and ultra-low interest rates. The transition might planning. not be much fun, but it could lead to a stronger and more stable financial system. Many of my friends tell me they read the magazine from cover to cover. There’s truly something for everyone, and I believe there are several stories that will pique your interest. Please let me know your thoughts when you can. I always enjoy hearing from you. Sincerely,

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.”

Every recession varies in length and depth, but all recessions tend to put