facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
In the Markets Now - Recency and Recessions Thumbnail

In the Markets Now - Recency and Recessions

(Baird’s Ross Mayfield wrote the following piece in July 2022)

LOOKING AT A LONGER-RUN HISTORY OF RECESSIONS

Of all of the behavioral quirks we humans display, recency bias is one of the most prevalent. It is the tendency to give greater importance to recent events over historical ones in our mind. For example, if someone asked you to name ten books you’ve read over the course of your lifetime, you’d probably end up skewing more towards books you’ve read lately—the information is more readily available, and therefore it’s what comes to mind first. This phenomenon is everywhere, and investing is not spared.

Take our current bear market. Over the last decade, we have seen two other bear markets in the S&P 500—2018 and 2020. Both were characterized by rapid declines but also sharp, robust rebounds—classic V-shaped bounces. When calling to memory how bear markets work, many investors will undoubtedly think of these events first. But recent does not mean representative—the average bear market since WWII has actually lasted nearly a year and takes closer to two years to regain prior highs. Recency bias can deceive us into thinking one thing when it may not be true.

On the other hand, consider recessions. There have been two in the last twenty years—2008 and 2020—and these are likely the ones that most quickly come to memory when “Recession” flashes across CNBC. However, again, recent doesn’t mean representative. 2008 and 2020 were two of the more cataclysmic economic events of the last century: the Covid-19 crash caused the largest spike in unemployment in modern history and saw economic activity functionally halt. Meanwhile, the 2008 Crisis saw the second biggest peak-to-trough drawdown for US GDP since WWII and remains the longest downturn since the Depression.

Wherever we are headed—recession or mere slowdown—the base case for how it goes shouldn’t be based on recency. Throughout history, there have been plenty of milder recessions where GDP dipped but didn’t plummet, the unemployment rate rose but stayed in the mid-single digits, and the economy resumed higher within a year (e.g., 1949, 1953, 1958, 1960-61, 1969-70, 1980, 1990-91, 2001). In fact, stock market performance from the start of these milder recessions has actually been quite positive.

And while the US economy is in uncharted territory thanks to the pandemic and Russia-Ukraine war, there are still pockets of strength that would imply any slowdown could be of the milder variety. The Federal Reserve is raising interest rates to intentionally cool the economy, but the job market is still white hot, consumers are actively spending, and activity—both in manufacturing and services—is expanding, if at a slowing rate. So while a slowdown is likely coming, we should keep in mind two things: milder recessions are more common than we may remember, and the resilient US economy still has plenty of wind at its back.

In the meantime, we are here to address any concerns you have about the markets or your financial plan.

Disclosures
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2022 Robert W. Baird & Co. Incorporated.