Everything you don’t want to know about recessions

So many people are predicting a recession that we’d be almost surprised if there wasn’t one.

After all, the Federal Reserve (Fed) has been raising interest rates for more than a year to curb inflation. Credit has already tightened and regional US banks have gone bankrupt. Even if the job market remains stubbornly strong, Fed economists expect the economy to slow enough to enter a recession.

Something to worry investors, because “recession” rhymes with “stock market fall”: the bear marketas they say… For example, during the 2020 recession at the start of the pandemic, the S&P 500 index fell nearly 34% from its peak.

Will we have a recession this year? I do not know. But recessions are a part of life. I’ve had six of them in my career — not to mention countless stock market yo-yos — so I accept that neither I nor anyone else can reliably predict them.

Still, I’m a consistent investor, mostly keeping plenty of cash safe and keeping a decidedly long-term view, steeped in history.

Hanging on isn’t always easy. Uncertainty about the future can make investing unbearable. But the past can bring some comfort.

Stocks have always rebounded from recessions, sometimes very quickly. I asked Dimensional Fund Advisors, a large asset management firm based in Austin, Texas, to do some math: the market has performed reasonably over 10- or 20-year periods after recessions; but not always on a shorter horizon.

recessions

A recession is “a significant decline in economic activity that spans the entire economy and lasts for more than a few months,” according to the National Bureau of Economic Research (NBER), the quasi-official entity that determines when and when to start. end recessions in the United States.

A fairly simple task, one would say. But in a large and complex economy, determining when a recession took place is not obvious, even after the fact.

The NBER takes its time to decide.

If there is a recession, we will know for sure long after it starts, maybe even after it is over. That’s what happened last time. It started in February 2020 at the start of the pandemic and ended in April 2020. But the Bureau waited 15 months, until July 2021, to declare that there had been a recession.

In the past, these diagnoses “took between 4 and 21 months, specifies the office. There is no fixed rule when it comes to deadlines. We wait long enough for the existence of a peak or trough to be certain, and until we can precisely date the peak and trough. »

Often, stocks fall before the recession and rise before the recovery.

The NBER “only dates recessions after they start,” said Marlena Lee, head of investment solutions at Dimensional Fund Advisors. The markets, for their part, announce them well in advance. »

Historical returns

Since 1948, there have been 11 recessions in the United States¹. At my request, Mr.^me Lee calculated the annualized total returns for the S&P 500, including dividends, from the first day of the month following the start of the recession.

These averages seem reassuring to me:

With compounding, $1 in the index would be worth $10.56 after 20 years, on average. So far, so good.

Now, the caveats are in order.

These are only long-term averages; there are great variations between them.

The best return over 20 years (1980-2000) was 17.2%, annualized ($1 invested in February 1980 was worth $24.02 20 years later).

The worst return over 20 years (1960-1980) was 7.3%, annualized ($1 invested in May 1960 was worth $4.09 20 years later).

Of course, I’d rather have $24.02 in my pocket, but even $4.09 wouldn’t be so bad.

heavy losses

Yield varied much more over shorter intervals. Thus, a year after the 1953 recession, an investment in the S&P 500 would have gained almost 32%.

But some years have been really atrocious. A year after the start of the recessions of 1973, 1981 and 2007, the stock market was still falling. The last (the crisis of subprime) was the worst.

In 2008, a year after the start of this recession, the S&P 500, including dividends, had lost 37%. In other words, if you had invested $1 in the index at the start of the recession, it was worth 63 cents a year later.

In 2010, over three years, you were still in the hole: your dollar was worth 92 cents. In 2012, over five years, you finally had gains, but not much: your 2007 dollar was worth $1.09. After 10 years, in 2017, it was better: $2.26. The verdict over 20 years? We’ll see.

The last recession, the one that started in February 2020, quickly led to excellent returns, despite the initial losses. A year later, the dollar invested in February 2020 was worth $1.31. Over three years, it was worth $1.41. I bet it will continue to rise over the next two decades, but I have no guarantees.

My findings

History is rich in lessons, but the past is no guarantee of the future. Historical returns are not a reliable guide. If the stock market outperforms the past, so much the better. If it does less well, you may be in fairly good shape if your investments are diversified and invested in various regions of the world.

That said, as long as the economy continues to grow despite recessions and markets perform relatively well, there is reason to be both optimistic and cautious. Although I am an accredited investor, I am not risking the money in the markets that I think I will need in the next three to five years.

As a precaution, I hold cash in various places, including government money funds and government-insured savings accounts. Bank certificates of deposit and treasury bills are also good choices.

For the long term, I invest in bonds and equities in large, diversified and inexpensive index funds that reflect all of the world’s markets, which spreads the risk. In 2022, technology stocks fell, but energy stocks rose. Bonds have had miserable results, but I expect them to rebound in the coming years. We will see all of this.

Anticipating recessions or relying on economists or Wall Street pundits to determine when to invest and what to hold on to, all seems fruitless to me.

First, I will make sure that, whatever happens, I can pay the bills. Then I will continue to be optimistic, betting that, over two decades or more, the stock market will appreciate, despite those dreaded recessions.

1. There have been 10 in Canada according to the CD Howe Institute Business Cycle Council.

This article was originally published in the New York Times.