Inflation, Recession, Bear and Bull Markets: Facts and Advice
A bear market is a period of time during which securities prices drop by 20% or more over a period of months. We are in a bear market that started in January. The average length of a bear market is approximately 10 months. The Pandemic Recession of 2020 lasted 2 months. Some are much longer as during the tech bust 2001-2003. On average, stocks decline by -36%.
During bull markets, when stock prices and other assets rise steadily, usually during expansionary business cycles, stocks have gained on average 114% over 2.7 years. History has shown that staying invested once the stock market is down 20% or more has paid off with two exceptions because of the length of time of recovery, the 2001 tech bubble and the 2008 financial crisis.
Over the last 20 years, 70% of the stock market best days have been within two weeks of its worst days. It’s impossible to accurately predict when these cycles will begin and end but we do know they are normal and will occur. Since 1928, there have been 26 bear markets and 27 bull markets but in the 92 years of stock market history, 20.6 years were bearish and 71.4 were bullish. (Zachs, Hartford Funds, JP Morgan) We were in a bull market since the Global Financial Crisis recovery starting in 2009 until the Pandemic-induced bear market 2020Q1. Then we returned to the bull market. It’s been a long ride on that bull.
When the global economy shut down during the Pandemic and world economic supply chains became unraveled, businesses and factories closed, and unemployment rocketed overnight. It’s hard to remember the shock of it all. Governments flooded the system with money to save that very system. Most of the money went to businesses and local governments. It worked, and the Pandemic Recession lasted only 2 months and within 2 years, unemployment dropped below 4%. It was a stunning turnaround.
An unsurprising negative side effect of the easy monetary and fiscal policies that kept the economies afloat is inflation, an increase in the prices of goods and/or services in an economy, so that currency loses buying power. Inflation climbed higher and faster than projected by the Fed, then has been exacerbated by the unanticipated Russia Ukraine War and the ensuing commodities shortage, especially in oil, gas and agriculture. So, although the economy was “saved,” serious inflation reared its ugly head as demand has increasingly outstripped a factory shutdown/parts shortage/transport blockages-dwindled end-product supply. The supply chain is slowly coming back online and demand is falling with the higher prices even as the consumer remains strong and the job market is tight. As supplies catch up with and then exceed demand, inflation should return to normal, acceptable levels and the Fed can reverse their rate increases.
Inflation is not recession. The simple definition of recession is a period of declining economic performance over two consecutive quarters. According to the Bureau of Economic Analysis (BEA), U.S. gross domestic product (GDP) decreased at an annual rate of 1.6% 2022Q1. They noted that an increase in COVID-19 cases resulted in continued business disruptions but that personal consumption expenditures (PCE) increased. Consumer purchasing remained strong. For 2022Q2, the Conference Board forecasts GDP will rise 1.9% (quarter-over-quarter), and an annual growth estimate of 2.0%. The Atlanta Fed GDPNow estimate for Q2 is -1.2%; Goldman estimates 0.7%. Obviously, no one knows now what the final growth rate for this quarter will be but it will be small, whether positive or negative. The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity and normally visible in production, employment as measured by payroll, and other indicators, not confined just to one sector such as production. It begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. During the Pandemic of 2020, the NBER determined the U.S. economy was in recession, however, it lasted only 2 months, the shortest on record.
In declaring a recession, the NBER gauges 3 factors: the depth of contraction, its duration, and whether economic activity declined broadly across the economy. GDP has risen rapidly since the start of 2021, at 4% per year averaged over the 4 quarters ending March 30, 2022. The market for goods and services has been booming. For its second measure of national output, gross domestic income, GDI rose during 2022Q1. Again, even using a more complicated formula, it is a close call whether this measure will be positive or negative for 2022Q2. Federal Reserve Chair Jerome Powell joins others in recognizing that as the Fed continues to aggressively raise rates to combat inflation, a recession is a possibility.
In a 2022Q2 CNBC CFO Council survey of 22 CFOs of major corporations and organizations, all believed we will experience a recession some time in 2023, however, over half are confident in the Fed. Consensus is that with rising rates, inflation will subside to normal levels, and the Fed will pivot and reduce rates accordingly; that the recession will be shallow and short-lived. That is the hope. The unemployment rate is close to the lowest in 50 years, achieved in under 2 years thanks to steps taken during and after the pandemic recession. There still are on average 2 job vacancies for every unemployed worker, the highest since the data have been recorded. However, it is tricky to raise rates to tame inflation and not cause a recession. That is why a downturn at some point in the next 2 years is more likely than in the recent past. The Fed will continue to raise interest rates this year but it’s important to remember that they are raising them from virtually 0% just 2 years ago. Rates are still low. Whether economic activity will continue to expand or when it will contract and by how much is unknown.
During this time, it is critical as investors to continue with the existing portfolio allocation but to also reassess risk tolerance so that during and out of the bear market bottom, the investments continue to reflect the risk you are willing to tolerate based on the established long-term financial goals and objectives. If possible, the best thing to do during a bear market is to add to good stocks that are on sale.