It’s become fashionable to be bearish

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I wish I had a quarter for every recession forecast I have heard during the past few years.

 

Like someone with hypochondria, fearful forecasters feel economic doom and gloom is right around the corner after every dip in economic data or shift in economic policy. Quick, how many recessions has the United States had in the past half century? The answer is eight: one in the 1960s, two in the 1970s, two in the 1980s, one in the 1990s, and two in the 2000s.

Since 1960, the country has gone through one or two recessions per decade, on average. It has been seven years since the last recession. Therefore, we are overdue! So what is the problem?

Just like stock market corrections, recessions are normal and expected. Peaks, recessions, troughs and recoveries are part of the business cycle. If we look at the four recessions that occurred before the most recent one, we see that not all recessions caused a significant stock market decline like the one in 2008-09.

Official recessing timing               Total S&P 500 Return

February 1980 - July 1980                       9.47%

August 1981 - November 1982                14.58%

August 1990 - March 1991                       7.99%

April 2001 - November 2001                   -0.90%

January 2008 – June 2009                     -35.00%

Source: NBER official recession timing from FRED database. S&P 500 total returns from Dimensional’s Return 2.0 program. These are index returns and do not represent actual investments. Past performance is no guarantee of future results.

Regrettably, many investors still cannot shake the memory of the 35 percent decline in stocks prices during 2008-2009, which came to be known as the Great Recession: the worst period since the Great Depression of the 1930s. I understand the temptation to believe in doom and gloom, as the gut wrenching panic of 2008-09 was painful. Perhaps the Great Recession’s excruciating downward spiral of the stock market is the reason that according to the Federal Reserve Board analysis in 2015, 55 percent of Americans have no money in the stock market! Even the hint of a recession sends these good folks into a theoretical funk, while their shaking finger is hovering over the panic button.

Nevertheless, I will agree with the bears that it is not difficult to conjure up doomsday scenarios, as there is potential for things to turn ugly in a New York minute. Only a fool would suggest otherwise, but as Thomas Howard says, the risk of “cataclysmic failure” is always present in any economy or financial system, but when times are good this risk is systematically underestimated (classified as a “won’t happen” scenario), and when times are bad it is systematically overestimated (classified as either “will happen” or “might happen”). Nevertheless, are we going to live our life and invest our money by fear or faith? I have always been on the faith bandwagon, and it has served me well. I suggest it could the same for you.

When I am asked if I think we are heading into a recession, my reply is, “Eventually, but I do not know when. Furthermore, neither does anyone else and that includes the permabear peanut gallery! It is all a guess, an educated guess perhaps, but a guess nonetheless.”

 Even if I somehow knew in advance how the economy was going to perform, I would not advise my clients to alter their holdings in advance because business cycles provide little information about subsequent changes in the stock markets. As I see it, to change allocations now based on economic conditions would contradict economic logic and violate my duty to act in their best interest. Moreover, I have long argued that preventing clients from bailing out of a well-designed long-term investment plan is the single most important job of a financial advisor.

Therefore, I encourage you to keep your itchy finger off the trigger and just stay the course. In other words, don’t do something, just stand there!

Harry Pappas Jr., CFP®

Managing Director-Investments

Master of Science Degree Personal Financial Planning

Certified Estate and Trust Specialist™

Certified Divorce Financial Analyst®

Pappas Wealth Management Group of Wells Fargo Advisors

818 A1A N, Ste. 200

Ponte Vedra, Florida 32082

904-273-7955

harry.pappas@wellsfargoadvisors.com 

The use of the CDFA™ designation does not permit Wells Fargo Advisors or its Financial Advisors to provide legal advice, nor is it meant to imply that the firm or its associates are acting as experts in this field.

 

Wells Fargo Advisors LLC, Member SIPC, is a Registered Broker-Dealer and a separate non-bank affiliate of Wells Fargo & Company.

This and/or the accompanying statistical information was prepared by or obtained from sources that Wells Fargo Advisors believes to be reliable, but its accuracy is not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

 

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