Hide and Seek

During times of volatility, especially the type of volatility we have seen over the last six months, the common question asked is ‘where do we hide’? When you feel beaten and wondering when the next shoe will drop, it is natural to shift to a protective mentality. The first half of the year has given us negative returns, inflation numbers we have not seen in years, a Federal Reserve (Fed) strategy to head off economic stress, and concerns over consumer behaviors.   All of this leaves us spinning with questions about what is next, how much more is in store, and is there a straightforward way to work through this?  We know that over time the stock market trends upward, and though we are currently experiencing a unique time-period, there will be brighter days ahead. So as we ask ourselves, ‘where do we hide,’ we should also consider the other side and ask ourselves, ‘what opportunities can be sought that will enhance our portfolios over time’ because we are long term investors and need to keep this in context during times of stress and volatility. 

 The perfect storm continues for now with recent inflation numbers continuing to rise from 8.6% to 9.1% annualized, though we saw it slow a bit as housing and gas prices stabilized in the most recent week. Inflation is impacting consumers as they absorb price increases in gas, groceries, and other living expenses. Consumer sentiment has been declining and is at its lowest since the 2020 pandemic recession which was short lived. As consumers slow their buying and reassess expenses, we are beginning to hear reports from companies like Target, Walmart, and Amazon regarding excess inventories. This is in complete contrast to the supply and demand issues felt early in the pandemic when companies were unable to meet consumer demand due to worker shortages and supply chain disruptions. The Fed is considering another 0.75% to 1% rate increase in July in an attempt to bring inflation down. Some experts are forecasting inflation may be nearing its peak and believe that the Federal Reserve could pause after this next rate increase. Market strategists also believe we could experience a mild recession sometime in 2023, but this is not a reason for investors to panic. 

 The thought of a recession, whether mild or severe, sends chills through the minds of investors. In U.S. history we have had nineteen noteworthy recessions dating back to 1893. Since World War II there have been thirteen recessions according to the *National Bureau of Economic Research”. [1] On average one happens every six years. Investors have reason to worry in the short term given the decline in their portfolios, however it is the long-term that investors should not lose sight of to be successful during these unsettled times. No one knows when a recession begins until after it is over. At present not everyone is convinced that a recession will happen. Keep in mind that we have recovered from all the previous recessions. Investors need to shrug off the constant reminder that our portfolios are down. Negative times turn to positive as we cycle through the tough times.  There are sectors of the market that do well during a recession such as healthcare (biotech and pharmaceuticals), and consumer staples (food, beverages, household items, personal products, alcohol, and tobacco). Companies that pay dividends and are well-financed tend to weather recessions better. That does not mean these investments are positive during the downdraft. If history is any gauge recessions last about six to 12 months on average.    

 Interestingly the chart below shows not all years are negative during a recession and most years coming out of a recession have been positive.

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No one can predict the outcomes. In fact, there is no such thing as a recession-proof investment. Diversification is something we believe is the answer to any type of volatility whether it is a market correction or a recession. No one has a crystal ball as to when markets hit their high and when they bottom out. Diversification gives you a less volatile outcome over time. 

 It is difficult these days to remain positive when the daily trend is pointing down, but Warren Buffet puts a spin on investing with one of his most famous quotes, “Be fearful when others are greedy and greedy when others are fearful.” Investors need to look back in history to understand that there are opportunities ahead when the economy turns back up. Recessions and volatile markets can be frightening times, but if you are investing for the long term, what’s most important is to keep an even keel. In many cases, the best thing to do may be nothing at all — to trust the market’s resilience and the diversification you’ve built into your long-term portfolio.

 During these times we identify opportunities to rebalance your portfolio using tax loss harvesting to help offset any current or future gains. We have also been weighting the portfolio to value stocks and trimming the growth stock sector. International stocks are the cheapest in decades and we will continue to maintain holdings adding slightly in some areas. Although bonds in the first half had their worst returns in almost 50 years, the bond market has stabilized and has become attractive in select areas. 

No matter the type of investment environment, we are here to address your concerns and guide you through times of uncertainty to help you have positive outcomes over the long term. These short-term volatile times have not derailed us in the past and should not derail your diversified portfolios. We will endure together, and you will be successful when the markets turn. 

 Thank you for your continued trust and confidence. We care about you and your successes.  

IMPORTANT DISCLOSURES:  The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.  Information obtained from sources is considered reliable but is not verified.  The research and other information provided herein speak only as of its date.  We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information.  Performance information presented is not an indication of future results and index data is provided for market reference purposes only.  This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy.  This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed.  This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy.  This material is for educational purposes only.  Mis-transmission is not intended to waive confidentiality or privilege.

[1] *History of Recessions in the United States Causes, Length, GDP, and Unemployment Rates for Every U.S. Recession by KIMBERLY AMADEO    Updated June 03, 2022

[2] Source: CFRA Research, NBER, S&P Global.  Get the data  Created with Datawrapper*National Bureau of Economic Research