Does a Recession Mean That Our Investment Results Will Get Worse?
Short answer – probably not.
The longer answer reflects the importance of expectations. As we know, an economy in a recession, defined as at least two quarters of negative economic growth, is not good for businesses. It is also not good for employees because as businesses struggle, unemployment usually rises. While it would seem logical with businesses struggling and employees doing worse that investment returns would also suffer, that is not always the case.
Investment markets rise and fall based on expectations.
Those expectations are driven by forecasts of profitability, growth, and lots of other economic factors. Simply being in a recession does not lower investment prices. During the first half of the year, investment markets declined due to expectations of a global recession. Those expectations were based on very high inflation and the reversal of years of significant government stimulus. Prices adjusted rapidly lower as these expectations became more widely held.
What might seem odd to many is that in the month of July stocks and bonds recovered much of their losses from earlier in the year. It was also the first month following two quarters of economic decline. As defined above, July was the first month in which economists will later confirm that the United States had officially entered into a recession!
Expectations can change very quickly so there are no assurances that investment markets will not decline further. However, investment markets reflect all the expectations of investors around the world in their current prices. As July demonstrated, if the bad news of a recession was fully captured in prices prior to the start of the month, a few new optimistic expectations about the length and severity of the recession were all that was necessary to drive prices higher.
It is impossible to know what direction the markets will take going forward. However, we do know from investment research that successful investors minimize their expenses, evaluate the tax consequences of their choices, and manage their exposure to market risks through diversification.
We will continue to invest for our clients and families following those principles. If you have any questions about the investment markets, our investment approach, or any of the specific investments you own, please let us know. We want you to be comfortable with how you are invested and ensure that your investment portfolio correctly reflects your wishes, risk tolerance, income tax exposure, and cash flow needs.
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