It is no secret that the latest economic data has rekindled fears of an impending recession. The Atlanta Fed’s estimate for real (inflation-adjusted) GDP growth for the current quarter was just slashed to negative 2.8% from a previously optimistic 2.3%, while Bloomberg’s probability of a recession ticked up to 25%. No doubt, the ongoing tariff skirmish is not helping, especially as related to the health of the consumer.
Yet, if history has taught us anything, it is that market timing based on economic downturns is an exercise in futility. Those attempting to sidestep recessions by exiting equities often find themselves missing out on some of the best returns. Indeed, as I have long maintained, time in the market trumps timing the market. And recessions are only determined after the fact as to when they have started and ended.
Stocks Before, During and After Recessions
The market is forward-looking, meaning it typically begins to rebound well before an economic downturn has officially ended. Investors who wait for the “all clear” often find themselves buying stocks at much higher prices than where they sold. As the accompanying historical data shows, equities have historically posted spectacular gains, on average, coming out of recessionary periods. Equally important, returns during the 12 months before a contraction officially began were nicely positive, on average.
The Case for Staying Invested
We are not dismissing the near-term concerns. Housing data has softened, consumer confidence has declined, and unemployment claims have risen. But these are precisely the moments when patience and discipline are most critical.
A particularly relevant comparison today is the early 1980s—a period of sky-high inflation, aggressive Federal Reserve policies, and two official recessions. Despite economic hardships, stocks delivered fantastic returns, especially for Value and Dividend-Paying names. The takeaway? Recessions, while painful in the short term, historically been followed by long stretches of prosperity, so much so that staying invested through thick and thin has nearly always been the way to go!
Final Thoughts
No doubt, the media will continue to sound alarms, and skeptics will argue that “this time is different.” However, as we have seen time and again, stocks have overcome every previous economic downturn, geopolitical crisis and financial panic. Those who stayed the course, particularly in undervalued stocks, have been handsomely rewarded.
The data remains clear: recessions come and go, but equities endure.
For those who like what I have to say in this forum, I will be hosting a Webinar on Thursday, January 6 at 11:00 AM Eastern; 2:00 PM Pacific.
https://kovitz.zoom.us/webinar/register/9717297096423/WN_TNkq-QgdQ46lPdWjIh6PwQ
Disclosure: Please note that shares of the stocks mentioned are owned by asset management clients of Kovitz Investment Group Partners, LLC, a SEC registered investment adviser. For a list of stock recommendations like these made in The Prudent Speculator, visit theprudentspeculator.com.
Read the full article here