By Mike O’Donnell, CFP® and Ryan O’Donnell, CFP®
Key Takeaways
Time in the market always beats timing the market.
Missing out on just a few of the biggest days in the market can have devastating consequences for your portfolio.
Stocks are a forward-looking indicator not a trailing one. They typically start to rebound months before the end of a recession.
Chances are, we’re already in a recession. But even if we’re not, don’t do anything rash with your financial plan. Markets often hold up quite well during recessionary periods and you don’t want to miss out on the eventual recovery. More on that in a minute.
With preliminary GDP figures showing a second consecutive quarterly decline in GDP in Q2 – albeit modest -- we’d technically be in a recession using conventional metrics. We won’t know for sure until many months down the road. But as the old saying goes, “economists have predicted nine of the past five recessions.” But that doesn’t necessarily mean the economy will stall out. And it’s not necessarily a bad thing for businesses or investors if the dreaded “R” word helps keep runaway inflation in check.
Not sure if you noticed, but stocks (S&P 500) quietly gained 8% during the month of July and stocks are about 12% higher than they were after the recent low point set in mid-June. We’re sure there's more volatility ahead and no one knows for sure whether the current rebound will last. But the stock market tends to be a forward-looking indicator of the economy, and that’s why we’re seeing some hints of optimism after all the doom and gloom this year.
Markets typically bottom out and start to rebound months before the end of a recession as the chart below shows. Just don’t sit on the sidelines waiting for the market to issue you an all-clear signal that it’s safe to get back in.
AVERAGE: -1% +16.9%
As mentioned in a previous article, a bad first half to a year doesn’t mean the full year will be in the red. The S&P 500 was down about 21% for the first half of 2022 – officially bear market territory. In fact, it was the worst first half to any year since 1970. But if there’s any silver lining, when stocks are down at least 15% at the midway point to the year, they often roar back strongly the second half. Not always, but often (see chart below).
What’s more, the S&P 500 has actually posted positive returns in seven of the thirteen recession years since World War II, and the average decline in those recession years is only 1%. In fact, the market has been positive all but three times in the year following recessions, with an average gain of nearly 17%.
Whether or not you believe the data we’ve shared with you, don’t try to time the rebound. It may have already started back in mid-June in which case you missed out on 12% of gains if you’ve been sitting on the sidelines in cash. Or the rebound may fizzle short-term, and we’ll have continued ups and downs for a while. Nobody knows for sure. The point is you’ll never get an “all safe” memo from the Fed, the NYSE or your brokerage house that the bear market is over it’s safe to get back into the stock and bond markets. It’s better to stay invested, stick with your plan, and have your trusted advisor help you rebalance your portfolio as needed, especially if your life circumstances have changed recently.
FOMO (fear of missing out)
One of the biggest mistakes we see investors make – whether close to retirement or just entering the workforce – is missing out on the best single days in the stock market. And those big days often came during the earliest days of a recovery.
Going back over the past 15 years (ended December 31, 2021), if you stayed fully invested in the S&P 500 over that time, your initial $10,000 investment would have grown to $45,682 – a 10.66 annualized rate of return. But if you missed just the 10 best days in the stock market over that 15-year period, you would have earned just $20,929 (5.05% annualized). That’s less than half of what someone who remained fully invested would have earned. If you missed out on the 20 best single days over that 15-year period, you would have only $12,671 in your account (1.59% annualized) about 70% less than someone who remained fully invested and so on. Talk about FOMO (Fear of Missing Out).
Source: Putnam Investments
Conclusion
Remember, stocks are not valued based on what's happening today; they are valued based on what the investment community thinks their future profits, costs, revenue, new products and ultimately future cash flows will be. It’s a long-term game. Trying to pick a stock or time the market is gambling and not investing. Be an investor.
As the old saying goes: “Time in the market always beats timing the market.”
We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.
