Recession. What next?
Well, I was going to write something original, but I read a great piece by fellow financial planner and friend of mine Matt Aitchison at Clear Vision Financial Planning. His own note to clients touched on all the points I would likely make myself.
So, I thought why reinvent the wheel? With permission, I’ve shared Matt’s full piece below, or you can read it on Matt’s website HERE. I hope you find it helpful.
Take it away Matt:
I’ve been asked a lot where I see everything going next. Now, I don’t have a crystal ball, but here are some thoughts…
In the short term, no-one has any clue as to where markets may go. It’s clear that the Coronavirus has provided challenges for the economy as a whole. Companies of all sizes who have low cash reserves and/or poor profitability are struggling. Whole sectors, such as travel, are creaking under the strain of lack of demand.
This means there will almost certainly be some casualties. However, as with any time of difficulty, there will be winners. Those businesses who have good cash reserves, are profitable and have a good business model will survive and, in some cases, thrive.
“As with any time of difficulty, there will be winners”
There is also a possibility that some of the great companies of tomorrow are starting right now. History suggests this is entirely possible with examples including companies such as Disney (formed in the Great Depression), Microsoft (formed in the mid 1970’s oil crisis) and Airbnb (formed in the last financial crisis).
“Some of the great companies of tomorrow are starting right now”
What about recession?
But what about the dreaded R word? Is it worth running for the hills whilst the global economies are in recession? If we look at the evidence, the answer is no.
In the past century there have been 15 recessions in the US. In 11 (73%) of those recessions, stock markets were positive 2 years after the recession began. Research has shown that stock prices incorporate the expectation of a recession and fall prior to the recession beginning. The average annualised return 2 years after the onset of these 15 recessions is 7.8%.
“Stock prices incorporate the expectation of a recession and fall prior to the recession beginning”
Recessions understandably trigger worries. But a history of positive average performance following a recession can be a comfort for investors wondering about sticking with stocks.
A bumpy ride
This doesn’t mean it will be smooth sailing. If we look at the US market over the last 20 years, there have been declines of between 3% and 49% during the years. However, in 15 out of 20 years, the stock market has ended the year with positive gains overall. Notably, in 2009 the US stock market dropped 27% in the year but had a 28% gain by the end of the year.
What does that mean for you?
So, what is the message?
If you have a well thought out, globally diversified investment strategy in place, and a financial plan that includes a sensible target for cash maintained outside of your portfolio, the right answer is to stay the course. This highlights the importance that your financial plan needs to factor in the whole picture. An investment portfolio is only part of that picture; it isn’t the financial plan by itself. This means ignoring the short-term noise regarding the economic outlook for markets or the economy.
It remains that the only reason to make major changes is if your goals change. For clients, if that is the case, please do get in contact to establish if we need to tweak the strategy.
For anyone who isn’t a client, now may be a good time to evaluate whether your financial plan and investment strategy is aligned with your goals.
Alex here. I’d like to thank Matt for allowing me to share this with you and for giving me the month off from writing my own blog! Normal service will resume in September. In the meantime, I hope you’re all in good health and have had the opportunity to enjoy the exceptionally hot weather.
Follow me on Twitter @AlexandreRiley