Waiting for Godot
Key Takeaways
The old maxim — “it's not about timing the market, but about time in the market,” has been proven true over the years and has proven true yet again.
After a depressing 2022 for investors, many had shifted to risk-off strategies or held safer assets in anticipation of bleak forecasts and the most widely anticipated recession in history.
And yet, markets have defied the bad news by having a decent 1H 2023, with double-digit returns for global stocks. If you are waiting for a good time to come back in or are waiting for the recession to materialise you may end up waiting for Godot.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
“Waiting for Godot” is a play which premiered in 1953, in which two characters — Didi and Gogo waited for the arrival of the mysterious Godot, who continually sends word that he will arrive but by the end of the play, he never does. Just like Didi and Gogo, investors are still waiting for the recession that was supposed to happen anytime from the end of 2022 to this year and many are holding cash in anticipation of another market downturn. The recession and corresponding market collapse may well end up like Godot — never appearing.
Usually after a big market decline, pessimism rises and negative outlooks and bearish forecasts increase. For the most part, the average of all expert forecasts are mostly bullish (whether right or wrong). And as we wrote last week in “Should You Listen to Experts”, for the first time in years, the outlook for 2023 was very pessimistic. Perhaps these investment specialists or strategists were trying to make up for having their predictions go very wrong last year and were overcompensating. As you can see below from the sampling of forecasts about what could happen this year, most sounded very dire.
We are midway through the year with global stocks up around +11% and global bonds up around +2.5% — going against nearly everything that was predicted. Perhaps the second half of the year could pan out differently, or maybe it won’t. Regardless, if you had waited for the Godot “recession” or “collapse”, you may be feeling a little FOMO now.
So even if the dreaded recession occurs this year or the next, what should we expect from asset price performance? Should investors prepare in advance — by holding a higher allocation of safer assets or cash in order to buffer against any possible downturn?
Incredibly, there is a consistent pattern of how stocks perform during periods of economic downturns or in other words, recessions. Data from J.P. Morgan shows that stocks (denoted by the S&P 500) reach their worst, bottom out and recover way ahead — sometimes a year or more before the worst in GDP, earnings and wages.
What this means is that stocks will be rising and recovering in the face of negative news, pessimistic sentiment and the general assumption that stocks should be getting worse when in reality, it is getting much better. This has been the case through multiple crises and circumstances.
As for the present situation, it looks like it is on track to mimic all of the past cycles. Of course things could change in an instant — a civil war could erupt in Russia, AI could turn out to be a farce and the Fed could suddenly start a rapid hiking cycle again. These unknowns and the possible risks they pose are why you receive a return for the capital you invest. If you want certainty, and you don’t want risks, then a bank deposit rate would be an commensurate return for you setting your money aside.
So is it wise to prepare and wait for Godot? Probably not. A better way would be align your investment strategy with what you want to achieve. A shorter-term goal would mean taking less risks — so that when it is time to take out your money, the likelihood that it suffered high volatility and large drawdowns is low. The converse is true for a longer-term goal. Preparing and allocating this way is more efficient and less dependent on the vagaries of market-timing and the constant shifts that you will need to make all the time.
To find out more about how an investment strategy can help you with what you want to achieve, and maximise your long term returns, come and have a chat with us.
