Is the stock market going to crash? Are we heading for a recession? Should I start saving more for my children or get life insurance? How long until the stock market recovers?
If you’re asking yourself these questions, you’re not alone. The coronavirus pandemic brought an unprecedented amount of uncertainty and with it the stock fell by 25%. Many parents now find themselves working from home and homeschooling their kids. All while watching the stock market make wild moves, and digesting news that suggests we are in or rapidly heading towards a “recession.”
As parents, we know how you feel. Unfortunately, we can’t help with the homeschooling, but we can help you secure a better future for your children. To begin we will provide clarity on three topics: what recession means for you, how to react to the market volatility, and what investment strategies to consider during a period of uncertainty. We take solace in the words of notable investors throughout history who have helped shape our approach to helping our clients achieve their goals.
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”
Shelby M.C. Davis
What does the recession mean for you?
A recession occurs when there are at least two consecutive quarters of negative GDP (economic activity) after a period of positive growth. Recently, recessions in the US happen every eight to ten years. The housing crisis caused a recession that occurred about 12 years ago. Since then, the economy has had the longest bull run in history. This period of prolonged growth made the market overdue for a pullback. The current health crisis shocked the economy and served as a catalyst for a recession in 2020.
The good news is that recessions generally don’t last very long. The analysis of 10 economic cycles since 1950 show that recessions have lasted between eight and 18 months, with an average of about 11 months. Of course, if you lose your job, or any other source of income due to the stay at home requirements, this may sound like an eternity.. However, it’s important to have a long-term perspective, and look at the big picture.
Most economists agree that this current recession will have a V-shape type of recovery characterized by a quick bounce back to normal conditions after social isolation is over. Also, the government has developed an economic stimulus package that should support a strong recovery. Based on our estimates, this recession should only last 6-8 months. By fall, we should begin to recover.
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.”
Shelby M.C. Davis
How should you react to market volatility?
The stock market typically reflects investor sentiment and confidence about economic fundamentals. If you’re currently in the stock market or have a retirement or college savings portfolio, you recently witnessed unprecedented volatility with wild moves up and down. Many feel like their heads are spinning while deciding whether or not to sell, change investment allocation, or stay the course and wait for the recovery.
Our general advice is that if you already invested in the market, you should stay the course. During a recession, the stock market typically continues to decline sharply for several months. However, it usually enters bear territory before economists declare a recession and begins recovery a few months before the recession is over. In the case of the current market cycle, it’s already on the way down. Still, if you pull your investments out, it may backfire because you can easily miss the moment the market begins its upward ride. It’s often better to stay invested in avoiding missing out on the upswing, but be mentally prepared for more volatility for the several months ahead.
It’s important to look to history to predict what will likely happen in the future. During the last financial crisis, the market was spiraling down for almost 18 months until it erased 57% of its gains, however during the following economic expansion that lasted 11 years, the stock market returned over 400%. This recession should not be as severe since financial institutions are not nearly as leveraged. The market may fall 40-45%, but no one can predict how much precisely and you may sell at precisely the wrong time. It’s better to prepare for market volatility, but maintain a long term focus, knowing that eventually the market will rebound and bring more gains to your portfolio. This strategy especially holds for long-term investments like your retirement savings or education savings for your kids.
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
Pullbacks in the market are healthy and necessary to keep a bull market going. Over the last thirty-five years, the stock market on average pulls back by over fourteen percent a year. We tend not to remember those drops because the market tends to finish higher. As an investor, it is essential not to get sucked into the news and realize that events like this happen and usually have a short duration.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
What investing strategies should you consider?
Dollar-cost averaging – it’s best to buy into the market slowly over a few months, this prevents investing at an unfavorable time (it’s impossible to precisely time the market). Also, it’s best to buy investment securities when the market is down. So imagine that by investing gradually over the next few months, you will be getting stocks at a considerable discount.
Diversification – it’s essential to be spread across different asset classes, geographies, and securities to reduce portfolio volatility and exposure to the single stock or even country. The chart below is a good example of diversification:
Buy and hold – it’s important to remember that you should expect a 2-5 year hold time for anything purchased during the recession. If you have short-term liquidity needs, then buying equities during the recession may not be the most appropriate strategy.
Staying calm – Above all else, investors should remain calm and keep a long-term perspective when investing ahead of and during a recession. Emotions can be one of the biggest roadblocks to strong investment returns, and this is particularly true during periods of economic and market stress. Refrain from watching the news and checking your investment portfolio. Put your savings on autopilot. News may negatively impact your emotions, and if you sell under the influence of news, you will likely regret it later.
In a period like this, it’s essential to have financial experts and investment advisors you can trust. At UNest, our mission is to help parents secure their kid’s economic future, and we’re available to answer any questions and put your mind at ease.
UNest’s mobile fintech app helps parents save and grow the money needed to fund their children’s education. The UNest team has decades of experience as certified financial advisors, technologists, and entrepreneurs. The company partners with financial industry leaders to offer parents a pain-free way to build the best possible educational future for their children. While student debt in the US has reached a historic level of $1.6 trillion, 70 percent of people in the US don’t know about 529 plans. Only 14 percent are currently using them due to the complexities associated with the account setup and management. UNest demystifies this process with a paperless approach that takes only five minutes to set up. UNest is a fully accredited and registered financial advisor with SEC and FINRA.
First Chart: Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management. Data shown in log scale to best illustrate long-term index patterns. Past performance is not indicative of future returns. Chart is for illustrative purposes only. Guide to the Markets – U.S. Data are as of March 31, 2020.
Second chart: Source: Compustat, FactSet, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management. Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price to earnings ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. Guide to the Markets – U.S. Data are as of March 31, 2020.
Third Chart: Source: Bloomberg, Barclay’s, FactSet, Standard & Poor’s, J. P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of March 31, 2020.