Worried About a Recession?
Never miss out on an opportunity like a good recession.
Barely two years out of the COVID-19 recession in 2020, negative market returns and an aggressive interest rate hiking plan by the US Federal Reserve have made many people around the world concerned that we are headed toward yet for another dreaded R-word. Are we currently in a recession or headed into one? What should we do in terms of our investments?
Knowing how markets work during such events will help provide some perspective and also allow you to make the right decisions for your portfolio. Recessions are typically identified with a lag, often by months. Why? A recession is only called after two consecutive quarters of GDP decline, in addition to the assessment of various other metrics by economists (NBER in the US, MTI in Singapore). These indicators, such as consumption, income data and employment rates are not consistently dominant in the determination of past recessions and certainly, past recessions have come in all shapes and sizes.
More importantly, by the time a recession has been defined by analysts, the worst of its impact on markets has usually passed. The table below shows that the stock market had already bottomed out prior to the announcement month in two-thirds of recessions since 1980.
Business cycle peak and recession announcement dates sourced from the National Bureau of Economic Research. US market represented by the Fama/French Total US Market Research Index.
The chart below tells a similar story. Waiting for a better time to invest and trying to be more conservative during uncertain times may not help much. Stocks and the market in general would already have bottomed and would be on its way to recovery or more before the end of the recession is declared. For example; in the most recent 2020 recession, the market’s low point came in March, three months before the end of recession was declared in June 2020. That means missing out on substantial gains.
The important takeaway for all of us here is if you are fretting about a recession and are wondering whether to sell and wait for better days ahead — DON’T. The market recovers ahead of the end of the recession and the most sensible approach is to remain disciplined with your asset allocation; reducing exposure to your investments at any point may lead to missing out on brighter days ahead.
However, not touching your investments doesn't mean doing nothing. If you are really worried about an upcoming recession, here are some things to consider to mitigate any potential damage:
Keep your job
Don't job hop for the sake of a higher salary. In a recession, cost-cutting and downsizing in companies typically strike high-paying PMET positions more than others. The less you're getting paid (for the value you are giving to your company), the less likely you'll be fired.
Don't buy big ticket items.
If a recession is on the horizon, it would be a terrible time to buy that flashy expensive car or load up on a mortgage with big property purchase. Not only would you have problems paying off the loan if you do get fired, but you might also have to sell these assets shortly after its purchase – and at a much lower value than you just got it for. In any case, automobiles are one of the worst assets to buy, especially in Singapore.
Save more (#1)
Keeping a higher-liquidity buffer in a deposit account will give you easier access to your money in a crisis. This will definitely come in handy if your job is affected. Having this liquid buffer can also help you pay for your living and whatever immediate expenses that may arise. For example, if you need $4,000 a month for living and lifestyle needs and you have about $100,000 in bank deposits, you know that you can survive for up to 2 years while searching for a new job. This also saves you from feeling pressured to sell off your investments at the worst possible time.
Save more (#2)
Having that liquid buffer available would also be very valuable during a crisis when prices of assets are down. When the recession does hit, it would be a good time to pick up stocks at depressed prices (stocks on fire-sale!) to add to your investment portfolio, and this can significantly enhance your long-term returns.
If you worried about how to protect your portfolio or investments during a sell-off and want to know more, feel free to come and speak to us.
