The financial news is awash with warnings: recession looms! Economic indicators are flashing red, analysts are predicting doom, and the market is… well, the market is doing what it always does: fluctuating. It’s enough to send any investor — whether experienced or just starting out — scrambling to rethink their approach and start battening down the hatches. Wait, before you destroy your hard-built portfolio in the morning, let me recommend that you take a deep breath first. Let’s consider whether such a sense of alarm is warranted. Based on my years of experience covering market trends for OverTraders.com, I've learned that overreacting to recession fears can often be more detrimental than the recession itself.
The human element in investing is undeniable. We know that fear and greed are the two strongest motivators, and the media lights that fire, throwing gasoline on both sides of those emotions to cause panic. It can be tempting as an industry to get swept up in the panic and radically respond with knee-jerk reactions to near-term fears. I know even then at the height of the dot-com bubble bursting, the ubiquitous sense of dread that hovered above this city was almost tangible. For a lot of investors, myself included, it was easy to get the sense that you should sell everything and crawl under a rock.
History shows us that markets are cyclical. Recessions are a normal part of the economic cycle, and as brutal as they can be, they are brief. Most importantly, experienced investors can take advantage of these opportunities. For those prepared to endure some pain and treat the work as a marathon not a sprint, the benefits will be vast.
The worst thing I see investors do is try to time the market. As you can see, the temptation to sell at the peak and buy at the bottom is a powerful one. The truth is, predicting the market movement with that level of precision is extremely challenging, if not impossible. Recent data indicates that your odds of successfully cashing out at the market’s peak are about 1 in 15. That’s a risky wager to place! Not every investor will venture outside.
Just look at the imbalance that happened in the dot-com recession. The Federal Reserve responded by quickly cutting interest rates, lowering them from 5.9% to 1.8% in an effort to revive the economy. Even though the short-term pain was difficult to withstand, those who remained invested were rewarded as the market made a quick recovery and presented new opportunities to ensure success. In 1990, the federal funds rate fell from 8.1% to 3.5%. It was a bold move that underscored the stellar work done to prevent second home and tourism-based economic downturns.
So, what’s the wiser course of action? Instead of panicking and selling off your assets, consider re-evaluating your portfolio and making strategic adjustments that align with your long-term goals. This could mean an immediate, short-term shift like adding to your defensive sectors that traditionally do well in a period of economic turbulence.
Defensive sectors like utilities and consumer staples, for example, tend to significantly outperform the market when a recession is anticipated. In 2007-2008 Global Financial Crisis, utilities went up 10.3%. The consumer staples sector rose 7.2% as investors flocked to more stable investments and continued to stockpile essential goods and services.
Additionally, I have commissioned and heard about foreign investors finding refuge in traditional safe-haven assets. US Treasuries, the Japanese Yen and the Swiss Francs have all been solid performers on average, ranging between 7-10% return during recessions. In times of stress, these assets provide a measure of stability that acts as a shock absorber against market whiplash. Gold, as well, has long delivered a median return of 8% in times of acute market stress.
Another frequently missed tactic is to keep in mind the opportunity for hidden value. Risk assets, such as equities, typically perform very well during the second half of a recession. They don’t stop there — they do better during the next boom cycle too. The economy is beginning to look up. Thus, stocks of many companies, previously undervalued as the stock market reacted to fears of a recession, are climbing.
It's crucial to remember that every recession is different, and there's no one-size-fits-all approach to investing. It is clear that what was done before won’t automatically work going forward. Keep your eyes open, and do your homework. Always discuss your investments with a highly informed financial professional, who can work with you to develop a specific game plan that works within your individual situation and risk appetite.
I get it, the desire to emotionally overreact to a bear market is strong. It’s human nature to instinctively react and want to protect all your hard-earned dollars. As a former real estate and financial journalist, I’ve experienced the market’s peaks and valleys directly. That’s why I think a long-term investment strategy – combined with a healthy dose of patience and discipline – tends to provide the greatest benefits.
Just keep in mind that smart investment decisions should always be based on rigorous analysis and fit with your own financial objectives. Don’t fall victim to the fear-based storylines that always prevail when markets get shaky.
During a recession, as in 2008, IG bond spreads typically shoot up to at least 280 basis points. By comparison, they typically average more like 160 basis points in more typical times of economic stability. In short, they are a better predictor of a recession than equity markets are. This creates a more transparent signal for identifying strategic portfolio shifts.
The gut feeling that the odds of success are far improved by taking the path that looks counterintuitive nowadays. It was hard for many investors to jump into the stock market in 1982. The investors that left were deeply embittered by the lackluster performance of stocks over the last decade.
Don’t allow recession concerns to capsize your portfolio. Stay patient, stay engaged, and stay on track with your end game. Whether the market is up or down, you can succeed with the right approach. Keep calm, and you’ll surf the storm and be better off when it’s all over.
At the end of the day, great investing comes down to a combination of education, patience, and the ability to stand apart from any herd mentality. By maintaining a long-term perspective and making informed decisions based on sound analysis, investors can weather the storms of economic uncertainty and achieve their financial objectives.
