By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®
The quarter ended September 30th was challenging with U.S. Stocks and Bonds each dropping over 3% across the board. With the Fed still noncommittal about ending its rate hiking cycle and tensions escalating in the Middle East, it’s natural to be concerned.
As we’ve told many of you during our recent conversations, it’s important to stay the course. Take comfort in the fact that U.S. Stocks are up 13% year-to-date and have gained nearly 20.5% over the past 12 months. In fact, U.S. Stock have been averaging +9.14% annually over the past five years; and nearly +11.3% annually over the past 10 years (see chart below). They’re clearly outperforming other asset classes.
Meanwhile, yields continued to rise thanks to Fed rate increases, with the best rates coming on the short end of the curve. We continue to talk with clients about the benefits of earning interest on idle cash that might be sitting at the bank either in your personal account or in a business that you may run. We have an extensive cash management solution to help our clients earn 5%+ on idle cash. Give us a call for more details (530) 564-0960
Looming recession?
Rarely a day goes by when someone doesn’t ask what they should do with their portfolio if and when the long-feared recession actually hits. Our response is to cite Paul Samuelson’s famous quip: “Economists have successfully predicted nine out of the last five recessions.”
Nobody knows for sure if /when a recession will hit so it pays to take the long-term view. Stay disciplined and well-diversified because there’s clearly no consensus from the experts (see recent comments below):
In the Q3 Conference Board CEO survey, 84% of top execs said they are preparing for a mild recession over the next 12 to 18 months. “The gloom that pervaded among CEOs at the start of 2023 has lessened, but most are still treading carefully,” said Roger W. Ferguson, Jr., Vice Chairman of The Business Council and Trustee of The Conference Board.
Bank of America CEO, Brian Moynihan, recently predicted a 35% to 40% chance of the U.S. economy tipping into a recession by early next year—six to twelve months later than his prediction from earlier this year.
But Goldman Sachs last month lowered its estimated chance of a US recession over the next 12 months to just 15%. The report, titled “Soft Landing Summer,” pointed to a series of encouraging economic indicators on inflation and the jobs market that suggest the US economy will avoid the Federal Reserve-fueled recession that many feared.
However, Vanguard economists wrote in their mid-year outlook that they see a high probability of recession, although “the odds have risen that it could be delayed from 2023 to 2024.”
JPMorgan Chase economists said in a note last week that there could be a “synchronized global downturn sometime in 2024.”
According to economists surveyed by Bankrate, the probability of a recession occurring in the U.S. is significant. The survey, published in July reveals that Bankrate’s experts estimate a 59% chance of a recession taking place by July 2024.
The chart below may have summed it up best:
Recession not necessarily bad for investors
Whether or not a recession occurs, it shouldn’t cause you to alter your financial plan significantly. First, a recession is a natural part of the market cycle. We must trim the excess in order to set up the next economic expansion, right? In fact, since 1965, the S&P 500 has generated a median return of +8.5% in the 12 months that followed eight previous yield curve inversions, according to data from LPL Research and the St. Louis Federal Reserve Bank. If you recall from earlier posts, an inverted yield curve – when short term rates pay investors more than long-term rates – has occurred before every single recession since the Great Depression. However, an inverted yield curve doesn’t guarantee that a recession will follow. But if it does, a recent Wall Street Journal Report reminds us that it could be time for small-cap stocks to outperform their large-cap brethren. Did you know that over the past 11 recessions, a small-cap stock index maintained by MSCI has beaten large-caps in the 12 months after a recession was declared every time, leading them by 16.51 percentage points on average?
As always, it pays to be well-diversified. You never know which stock, asset class or sector will outperform and which will underperform. As Wes Crill, PhD, Senior Investment Director and Vice President, Dimensional Fund Advisors noted at the conclusion of the attached report, the first half of 2023 marked only the 10th time in the last century that value stocks have underperformed growth stocks by more than 20 percentage points over a two-quarter period. “More often than not, value has responded like the hero in an action movie, beating growth over the following four quarters in seven of the nine previous instances and averaging a cumulative outperformance of nearly 29 percentage points,” asserted Crill. “A positive average value premium following a large negative period is not too surprising. “
Regardless of value’s recent performance, investors should expect positive value premiums going forward. “That’s a strong incentive for investors to maintain a disciplined stance to asset allocation, so they can capture the outperformance when value stocks deliver,” Crill added.
Enjoy the beautiful autumn season. As always, we are available to meet or discuss ideas. Please contact us HERE to schedule a quick meeting with either Mike or Ryan.
