I hope this letter finds you in good health and high spirits. The Spring season is here, and with the new season comes new opportunities. Despite the ongoing global pandemic and its economic impact, we remain committed to providing you with sound financial advice and exceptional customer service as we navigate through these challenging times together. In this letter, I will provide you with a brief update on the current state of the market and other pertinent information you may find useful.
Overall, the economy is slowing down. But the question remains— will a recession arrive sooner in the year or later? Does it even matter? A recession is on the horizon, and fallouts from the financial sector and geopolitical risks remain. Despite that, there will be opportunities, and whenever the US Fed does announce a rate-hiking pause, the markets’ reaction is likely to be exceptionally positive. I see a balanced approach as the wisest course. The main indicators I will be keeping an eye on are the jobs and inflation numbers.
The stock market tends to be forward-looking. The price of stocks today is based on how well the market expects companies to do in the future. By contrast, most economic data is backward-looking. As such, the stock market is often a leading indicator for the economy. Changes in stock prices can signal shifts in economic conditions before they are reflected in the broader economic data. With this in mind, the recent volatility in the stock market can be viewed in part as the market pricing in the higher likelihood of a recession. Therefore, if we do enter a recession, it does not necessarily mean doom and gloom for equities as the below image highlights.
Don’t try to time the market, or the economy
It’s difficult to predict how markets will perform in the near term. What we do know is that they are constantly looking forward as shown above. If the consensus is that a recession is likely in 2023, then that’s probably largely baked into current share prices. Moving forward, the market will be looking for signals around the depth and duration of a potential recession, and the resilience of companies. Any positive developments on those fronts are likely to be reflected in markets well before they show up in economic data. Furthermore, back-to-back down years for equity markets are historically rare. Since 1950, the S&P 500 Index has seen consecutive calendar years of negative returns only three times.
History also shows that significant downturns are almost always followed by sharp, sustained recoveries over time. The chart below shows the performance of the S&P 500 in the aftermath of major declines dating back to the Vietnam War. On average, the index has delivered a total return of 333% to investors 10 years after a market crisis—if they remained invested.
SPX Index cumulative total return after crisis (%)Source: Bloomberg Finance L.P. For more details, please consult The Big Picture, as of December 2022
- Changes in stock prices can signal shifts in economic conditions before they are reflected in broader economic data.
- Stocks often rebound before a recession is over.
- When the market senses that conditions are set to improve, the subsequent rebound for equities can be very quick and substantial.
Paul Polyviou CFP, CLU
P.S. If you need a safe place to park any short-term money, we do offer high-interest savings accounts and GIC’s:
High-Interest Savings: 4.40% 1yr. GIC: 4.71% 2yr. GIC: 4.43%
*Rates are subject to change without notice and are effective as of April 9, 2023*