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Five Facts About Recessions

With this week’s market volatility the word “recession” seems to be in all the financial headlines.  There is no way anyone can accurately predict a recession.  The word recession itself is enough to cause consternation. Though there's no foolproof way to handle the ups and downs of the stock market, the following common sense can help.  We wanted to share Five facts to help put recessions in perspective: 

1)  A recession is defined by the National Bureau of Economic research as “a period of falling economic activity spread across the economy, lasting more than a few months.”  

Financial markets/investors view a recession as a market decline of 20% or more and is referred to as a “Bear” market.

2)  Recession are a natural economic phenomenon that occur with regularity.  

Most of us will experience many, many recessions during our lifetime.  These will vary in length, strength and duration.  The average S&P 500 ‘Peak’ to ‘Trough’ market sell-off is 30% going back to 1947. To get back to break even after a 30% loss you would need to achieve a 42.86% return (see chart #5)

U.S. recessions and S&P 500 composite declines from all-time highs

Graph that details recessions

Source: BEA, NBER, J.P. Morgan Asset Management. *Chart assumes current expansion started in July 2009 and continued through July 2019, lasting 121 months so far. These data can be found at www.nber.org/cycles/ and reflect information through July 2019. Past performance is not a reliable indicator of current and future results. Guide to the Markets – U.S. Data are as of July 31, 2019

Graph of "Length of economic expansion and recession"

3)  The average length of a recession is 15 months.

While the average market expansion is 48 months.  Our current expansion is believed to have started in July of 2009 making it 121 months in length and the longest in history.

4)  Time matters when you are investing.  

We know we are going to experience ups and downs in the market.  No economist, fund manager, advisor or any other person has been able to accurately predict market expansions or recessions.  Having your assets structured in a way to endure a recession as it relates to you short and long term goals is paramount.  Even though the markets impacts your portfolio, what matters most is your progress towards your individual goals.  Our clients investment portfolios are designed knowing we will experience both periods of expansion AND recessions.  

5)  After you experience a market decline, we want your portfolio to get back to it’s peak values as quickly as possible.

With that said, you have to achieve a return much higher than what you loss.  Here is a chart to give you an idea on returns needed to break even.


If you lose what do you need to gain chart

How can a portfolio thrive during a recession?

When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. The small returns that typically accompany low-risk investments may seem downright attractive when more risky investments are posting negative returns.

 But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.

Putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for you if your investment goals are short-term or if a long-term goal such as retirement has now become an immediate goal. But if you still have years to invest, keep in mind that although past performance is no guarantee of future results, stocks have historically outperformed stable value investments over time. (see chart #4)  If you move most or all of your investment dollars into conservative investments, you've not only locked in any losses you might have, but you've also sacrificed the potential for higher returns.

Silver Lining in clouds

There can be a silver lining – A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity to use your cash reserves to buy shares of stock at lower prices.  Downturns can also offer an opportunity to reallocate your assets to take advantage of the market movements. You may even increase your risk exposer by making equity investments at the lower valuations. 

Tax gain and loss harvest opportunities may also be present.   You can strategically take losses (or gains) to facilitate lower taxes today or in the future.  

Every client will have their own unique set of circumstances and will need to navigate any recession based on their individual needs. We are here to guide you.  If you have questions about these charts, content or other financial matter, please do not hesitate to call us.

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This document is provided by Herr Capital Management, LLC is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment, financial or tax-planning decisions.  Certain information herein has been obtained from third-party sources believed to be reliable, but we do not guarantee or warrant its completeness or accuracy.

Herr Capital Management, LLC - Where Prosperity Begins © 312-697-1600 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Herr Capital Management, LLC, a registered investment advisor independent of American Portfolios Financial Services, Inc. Investment products are not FDIC insured and involve investment risk including the loss of principal invested. Please consult your tax consultant for tax advice. 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.