If you polled 10 economists 12 months ago, all 10 would have predicted a recession in 2023. Well, here we are in the fourth quarter, and there is no recession, at least not yet. Are there economic questions, weakness, inflation fears, and higher interest rates? Of course. However, the economy has continued to grow, underscored by low unemployment. It’s difficult, perhaps impossible, to have a recession when anyone who wants a job can get one. Does this mean that we are out of the woods, and have achieved the “soft landing” that Chairman Powell has hoped for? Maybe, maybe not. As Yogi Berra famously said, “predictions are difficult, especially about the future.”
Whether we get a recession or not, it’s important to remember what we’ve been through. Over the past 50 years, there have been three bear markets so severe that the US equity market lost about 50% of its value in a short period of time. Each crisis seemed existential and insoluble at the time, with the familiar refrain of “this time it's different.” 1973-74 saw an oil embargo, Watergate, and the S&P 500 down 48%. 2002 saw the implosion of the dot-com bubble, the Enron scandal, and a 49% market decline. Finally, the global financial crisis in 2008-9 saw a 57% decline. Not to mention other crises such as the 1987 crash (down 25% in a single day), and the COVID crisis, where the market lost 34% in only 33 days. So, what happened to investors over this 50-year period? There were certainly many investors who read the financial headlines and sold during these crises, locking in their losses. However, if you had simply invested $10,000 in the S&P 500 in 1973, before the 48% decline, held on and reinvested dividends, your portfolio would be worth over $1.5 million today. As Warren Buffet stated, “the stock market is a device for transferring money from the impatient to the patient.”
While every crisis tests our resolve, we must remember that the “market” is not some esoteric investment vehicle. If we own the market, we own small pieces of the largest and most profitable companies in the US and around the world. These companies have shown, over and over, that they can adapt to different economic environments and be profitable. While no two crises are identical, it’s never really different. A diversified portfolio of equities is the only proven way to outpace inflation and build wealth over time. Of course, it’s important to have an investment policy that matches your financial plan, and this may include fixed income and alternative investments, but the core of your long-term holdings should always be equities.
As always, please do not hesitate to reach out with questions or if you’d like to discuss your portfolio or financial plan.