Looming Recession? Don’t Be Scared!
Key Takeaways
An overwhelming number of recession forecasts do not necessarily mean a recession is certain.
Major recessions of the past show that the stock market hits the bottom far ahead (at least several months) before other economic indicators (e.g. GDP, earnings, etc.)
Making rash investment decisions in response to unfavourable reports on the news is akin to shutting the stable doors after all the horses have bolted.
Bad news is an investor's best friend.
— Warren Buffett
Two thirds of the economists polled by the World Economic Forum have called for a global recession in 2023. Trawling through the vast amount of comments and predictions for the year would also give you a sense of foreboding gloom. Perhaps you may have also been indirectly involved in some sort of downsizing this year — a common sign of slowing economic activity.
As such, it is no surprise that many investors and people are still jittery after 2022’s market performance, coupled with the fact that a recession could be upon us soon. In fact, Google Trends data shows that “recession” is the number one topic that people in Singapore have searched for in recent times compared to other parts of the globe.
Recessions are certainly not pleasant, especially with job losses and general economic malaise. However, they are certainly very tough to predict and a consensus view of “experts” forecasting such an event does not mean that it will come to pass. The main reason why so many are certain of a recession occurring is because central banks around the world, especially the US Fed, are particularly hell-bent on dampening demand and raising borrowing rates in order to slow down growth and reduce inflation.
Past Recessions & Lessons Learnt
But you do not need to be overly afraid of a recession, so don’t go running off to sell your investments just yet. For investors, knowing about how markets reacted during past recessions can provide a valuable guide for what you should or should not do. Digging through the data of past recessions shows a remarkable similarity to all of them — the stock market tends to bottom way in advance (at least several months) before many other economic indicators especially GDP (which is a primary component in calling for a recession).
1958 Eisenhower Recession
Stocks (represented by the S&P 500) bottomed in Dec 57, whilst other indicators like corporate earnings, wages and GDP didn’t get better till mid to late 58.
1970 Stagflation Recession
Stocks dipped twice but bottomed in Dec 74 whilst other economic indicators only started to improve in mid to late 75.
1980 Double-dip Recession
Stocks bottomed in Jul 82, whilst other economic indicators only started to improve from Jan 83 onwards.
1990 Savings and Loans Crisis and Recession
Stocks bottomed in Oct 90, whilst other indicators only started to improve from early 91 to as late as Feb 92.
2008 Global Financial Crisis
Stocks bottomed in Feb 09, whilst corporate earnings and GDP only started to recover around Aug/Sep 09. Wages on the other hand only started to pickup more than 1 year later.
2020 COVID Recession
Stocks bottomed in Mar 20, whilst the economy only started to pickup in Jul, whilst corporate earnings only recovered in Dec.
What About Now?
So far, the current cycle we are in now has occurred in a near textbook-style. Following the boom in asset prices such as stocks, real-estate, and speculative assets such as crypto in 2020 and 2021, commodity prices rose significantly (also caused by the Russo-Ukraine war) in early 2022, which already fed rising inflation. This then led to interest rate hikes causing asset prices to fall.
There should be no reason why this cycle would look very much different from the others. As such, the stock market would bottom even as the news on the economy, GDP, corporate profits and even employment gets worse. History clearly shows one thing, and that is that financial markets turn up before the economy does. The outlook for 2023 is very much rosier.
As long as you are in a broadly and globally diversified investment which has allocated to all the regions and sectors in the world such as your GYC portfolios, then there is no need to be scared of a recession.
