Is a recession inevitable? So far, the U.S. economy has overcome inflation well enough to continue moving forward, with the Atlanta Federal Reserve’s GDP outlook suggesting third-quarter growth of 3.5%.
But it certainly feels like ever-rising prices are taking a toll. Goldman Sachs says there’s a 20% chance of a recession taking shape within the next 12 months. That means there’s an 80% chance we won’t suffer one. Somehow, though, those odds are still a bit uncomfortable, given that such weakness would likely drag stocks down too.
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Just don’t become so worried about protecting yourself from a potential setback that you lose sight of what’s realistically predictable, and what isn’t.
Can’t predict the unpredictable
When the economy stinks and stocks are tumbling, it often feels like the misery will never end. In this vein, investment firm Stifel Financial reports that since 1932, the typical bear market lasts a year and a half and pulls the S&P 500 (SNPINDEX: ^GSPC) down 35% from its pre-bear peak. This action unwinds a large chunk of the average bull market gain of 178% over nearly five years.
It’s tempting to attempt to avoid as much of a bear market as feasible, just as it’s tempting to participate in as much of a bull market as you possibly can. There’s a giant proverbial fly in the ointment, however. That is, you can’t possibly know when or where these peaks and troughs will take shape.
That’s why you can’t possibly time the market well enough to make such an endeavor worth your while. In fact, trying to do so can do more harm than good to your portfolio.
Image source: Getty Images.
But the averages? Sure, those mathematical tendencies mean something. They’re averages of a wide range of inputs, though. The bull market following the 2008 collapse of the subprime mortgage market lasted 11 years and returned 400% from the bear market bottom. The 2022 bear market only lasted nine months and fell 25% from peak to trough, while 2008’s meltdown cut the market’s value by more than half.
The bull market coming out of the initial COVD-19 setback beginning in mid-2020? It dished out a healthy 114% return, but it lasted less than two years. The point is, assuming any part of the stock market’s history can help you accurately predict its future is a misguided notion.
Remaining ready is the key
Fortunately, there’s an easy-to-apply strategy to circumvent all these potential pitfalls. It’s admittedly boring — almost clichéd — advice. It’s true all the same, however. That is, simply buying and holding quality stocks that you can comfortably hold through the rough patches will produce much better net returns than attempting to only be in when times are good, and out when times are bad.
Your best recession “move,” therefore, is to do nothing even when standing still feels wrong. It isn’t. This presumes, of course, you’ve built a well-diversified portfolio of “forever” stocks that can help you stand pat.
This might help you get there: You don’t diversify to capitalize on what’s known. You diversify to protect yourself from the unpredictable curve balls you know the market’s going to throw your way sooner or later.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
History Says That Investors Who Make This 1 Move During Recessions Always Come Out Ahead was originally published by The Motley Fool