Recession seems to be here
July 2022
As my friend Gary Yeck once said, “everything is correlated when the crap hits the fan”. I don’t know if that is happening yet, but it is beginning to feel like it. The first half of 2022 was the worst in 52 years, since 1970, with the S&P 500 down 20.58%, and the Nasdaq index (largely tech stocks) was down 29.45%. International stocks in the EAFE index were about the same, down 20.97%. Bonds didn’t help, as the aggregate bond index dropped 10.35%. Commodities did better, with the GSCI Energy index up 63.46%, and Gold dropped only 1.43%.
We believe we are clearly in a recession, but are hopeful it might be short-lived. The definition of a recession is typically two consecutive quarters of negative GDP growth, and we had negative GDP in the first quarter and believe we were also negative in the second. There have only been three occurrences of negative ANNUAL GDP growth the past 40 years: 2020, 2009, 1991 (barely), and1982. The S&P 500 during those years was: +16.26%, +23.45%, +26.31%, and +14.76%. Positive each year! However, in three instances the prior year return was negative, one very negative.
Strategies we are using to endure this downturn are:
A below normal allocation to stocks, which we have been suggesting for some time.
Individual bonds are now paying more than they have in several years, and we are buying both short-term treasuries and investment grade corporate bonds that pay 3 – 4% or more, maturing less than 4 years. We do not own or want to own many bond funds or ETFs
We have been owners of high dividend paying ETFs and stocks for well over a year, and it has served our clients very nicely.
Though we do not like to be “trading” our client accounts too frequently, one strange phenomenon that we are beginning to see is the very quick rotation of stock sectors based on interest rates, inflation, and economic expectations. When rates increase due to the Fed and inflation, energy and industrials have rallied. When recession talks panic investors a bit, healthcare and consumer staples. Though this “rotation” has only happened recently, we will be on the lookout for this continuing to occur.
Nate Lovelle, CFA
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