ALL THIS TALK OF RECESSION...

There is much talk of global recession and economic slowdown in Germany, the UK, the US and China.

 

This tends to spook most investors, making you think that in some way it is only a matter of time before your portfolio will suffer as a result, because the logical conclusion is that recession leads to stock market collapse. Well, statistically speaking, not really. Let's look at some information: 

Germany is now in recession, the UK has had the largest contraction in manufacturing output since 2009, China is feeling the effect of Trump tariffs, so people are asking — are the markets predicting a recession? There is an old joke that the stock market has predicted nine out of the last five recessions.

 

Investors assume the stock market is generally forward-looking, so when the tea leaves are read to look for clues as to what may happen next, the knee-jerk reaction is to look at the direction of stock markets and start worrying about an impending fall. However, historically, the stock market hasn’t predicted any recessions!

 

Here’s a look at the performance of the S&P 500 using the returns 3, 6, and 12 months prior to the start of every recession since the late-1920s:
 

March 2001 was really the only meaningful correction, the dot-com crash occurred by around a year before the recession itself. Most of these other numbers look fairly run-of-the-mill and not out of the ordinary.

 

Using these figures the S&P 500, since 1928, has seen the market fall 20% or more 20 times and has fallen 10% or more (but no more than 20%) 27 times. The average losses saw stocks fall 24% and lasted 228 days from peak-to-trough. Interestingly, 31 out of the total of 47 times that the market fell double digits happened 'OUTSIDE OF A RECESSION'. That means 66% of the time a recession is NOT the cause of a stock market fall. 

 

We’ll have a recession at some point, but odds are the stock market won’t tip us off ahead of time.In fact, most of the time people don’t even realise we’re in a recession until after it’s already begun.

It’s possible that the stock market will  just freak out from time-to-time because there are so many other variables at the moment which can move the markets independently of the economy.

You may not have realised, but since the market collapsed in 2009 there have been corrections of -16.0%, -19.4%, -12.4%, -13.3%, and -10.2% in the S&P 500! 

 

Every time stocks begin to fall it feels different. And maybe this time it is, but the lesson to be learnt is that for all the talk of economic slowdown in the world, trade wars, Brexit, manufacturing indexes etc., these have no real bearing on the movement of stock markets and therefore on the performance of your portfolio. There will always be shocks that come and go, but don't get hung up on trying to predict when they will happen because, other than the odd time you might get lucky, the rest of the time you will be wrong. Just stick with it and the trend will be your friend, in the end.