By indwallet1 
Introduction
The stock market recently took a bit of a dip, and it’s not just limited to one region. Even the U.S. market, often viewed as a global indicator, has been on a downward trend. Many analysts are linking this to a potential recession. Some have predicted that the markets could fall by 30% or even 40%, igniting fear among investors. But how much of this is sensationalism, and how much is grounded in reality?
In this post, we’ll explore two key topics: First, the connection between recessions and stock market performance, understanding historical data to guide your portfolio planning. Second, we’ll dive into a multi-asset portfolio strategy that can help weather these uncertain times.
Understanding Recession and Its Impact on the Stock Market
A recession is defined as two consecutive quarters of negative GDP growth. This is not the same as negative growth rates, which is a much deeper economic issue.
For example, if a typical GDP growth rate is around 7%, a fall to 6.5% for two consecutive quarters is considered a recession—a slowdown, yes, but not necessarily a cause for panic. However, when GDP growth turns negative, say to -5%, then that’s when things signal more severe economic trouble.
But here’s where it gets interesting: just because the economy may be headed into a recession doesn’t automatically mean the stock market will tank. In fact, history tells a more nuanced story, with the stock market often performing better than expected during some recessions.
Historical Perspectives on Recessions
Going back to around the time of the U.S. Civil War, there have been 31 recessions overall. Out of these 31 periods, the stock market showed positive growth in 16 of them. So in around half the cases, the stock market not only survived the recession but grew in value. Roughly 15 recession periods saw market corrections.
What does this tell us? Fixating solely on whether a recession is coming might not be the smartest investment strategy. Historical data shows that recessions don’t always lead to deep market crashes.
Market Data: 1950 to 2022
Looking closer at data from 1950 through 2022, we observe a few important patterns. The S&P 500 saw an average drop of around 4% in the year leading up to a recession. Contrary to popular belief, the market wasn’t in freefall before the recession hit. After the recession, the market typically rebounded, with gains of around 15.5% in the year following the official end of the recession.
Even during the crises we remember most vividly—such as the 2008 Global Financial Crisis—the stock market’s correction, while heavy, was predictable. During the 2008 downturn, the stock market fell by a dramatic 66%, but within a span of 4 years, it had recovered.
Preparing for Typical Market Corrections
On average, recessions result in a stock market drawdown of around 21% over a span of 169 days. This means that if we are indeed heading into a recession in 2024, you should be mentally and financially prepared for this kind of drop. However, a repeat of a deep recession like 2008 is not guaranteed.
The key takeaway? Don’t panic. History suggests that the market tends to recover relatively quickly even after significant drawdowns. Rather than trying to time the market perfectly, it’s more important to prepare for these dips.
Recession: The Unemployment Factor
Pay attention to one overlooked indicator when it comes to predicting recessions: unemployment. Historically, recessionary periods are often preceded by very low unemployment rates. Low unemployment means that almost everyone has a job, people are spending money, and optimism about the economy is high. But this is often a prelude to a decline.
For example, just before the 2008 crisis, unemployment was very low. Once the bubble burst, unemployment spiked dramatically. The warning signs were there, but few took action in time. When unemployment begins to rise after being at record lows for an extended period, it’s a troubling precursor to a possible economic downturn.
Right now, we’re in a similar situation. Unemployment rates are low, yet recession probabilities for 2024 are on the rise. According to some estimates, the chance of a recession next year is around 65%. It’s something to keep tabs on, but don’t let it scare you into rash decisions.
Should You Time the Market?
It’s tempting to think you can time the market—wait for the S&P to hit that 21% correction level, then swoop in and grab bargains. But market timing is notoriously difficult and unpredictable. Even veteran investors rarely get it right consistently.
Instead of trying to time a 21% correction, it’s often smarter to diversify and put processes in place to handle volatility, rather than panic once falls begin happening.
The Role of Yield Curves and Market Volatility
Here’s a more technical but important concept: term premiums and yield curve inversion. When long-term bond rates fall below short-term bond rates, investors get nervous. Yield curve inversion, in simple terms, indicates that investors are expecting weaker growth or even a recession in the future.
What’s unusual now is that we’ve been in an inverted yield curve environment for one of the longest periods in history without seeing a massive market crash. This means volatility is likely to remain high.
Longer-term economic patterns suggest that we should expect more of a sideways movement in stock prices, rather than a drastic 40% drop. Volatility will be the name of the game in the coming months with short-term rallies followed by short-term corrections.
Navigating Sector Rotation and Stock Picks
Sector rotation—where different sectors go in and out of favor—becomes especially crucial during volatile times. For example, banking stocks might underperform while sectors such as technology bounce back. This constant rotation can create opportunities for savvy investors who know when to shift their focus.
Historically, the private banking sector has been slow to recover compared to other sectors, despite positive fundamentals like growing revenue and profits. Keep an eye on sectors that are consolidating now—they can deliver surprising returns once the market stabilizes.
Interest Rates: What’s Next?
Another key driver of market movement will be interest rates. Right now, interest rates in the U.S. are around 5.5%, but they’re expected to drop to around 4% by 2025. These changes in rates can act as a lever for governments to stimulate economic growth during a recession, making stocks more attractive as interest rates fall.
When rates get cut, money becomes cheaper to borrow, spending increases, and GDP growth returns. This ripple effect typically benefits the stock market, reinforcing the idea that even in a recession, not all is bleak.
The Power of a Multi-Asset Portfolio
Given elevated market volatility and potential corrections, diversification will be a key survival strategy. A multi-asset portfolio is structured to help you navigate the ups and downs of market cycles.
What should a balanced portfolio look like?
- Growth Assets: Stocks that can appreciate over time, providing capital gains.
- Defensive Assets: Low-risk stocks in stable sectors such as consumer goods or healthcare.
- Cash Flow: Assets such as dividend-paying stocks or cash-flowing real estate that give steady income even in down markets.
Real estate and bonds, combined with solid dividend-paying stocks, can provide a safety net during times of high market volatility. Having a diversified mix of assets ensures that even during a financial downturn, you’re not fully exposed to the risk of a market crash.
Cash Flow and Defending Your Portfolio
Aside from growth, a multi-asset portfolio should provide some defense and regular cash flow. High-dividend stocks, bonds, or real estate that generates rental income can anchor your financial position, allowing you to weather downturns better than a purely stock-driven portfolio.
In events of market turbulence, these assets provide liquidity without needing to sell your growth stocks during a dip.
Conclusion: Stay Calm, Stay Prepared
The likelihood of a recession in 2024 has sparked debate, and while a 20% market correction seems probable, the idea of a full-blown market crash is less certain. The key for investors is not to panic but to prepare.
Make sure your portfolio is diversified, focus on having a balanced mix of growth, defensive, and cash-flow assets, and be ready for volatility. Yield curve trends and sector rotations will continue to highlight opportunities. And, above all, resist the temptation to time the market—preparing for volatility is far more effective than reacting to it after the fact.
By structuring a multi-asset portfolio and watching indicators like unemployment and interest rates, you can confidently navigate whatever comes next.