The Week Ahead – Storm Clouds

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

With global growth slowing and markets selling off, it’s only natural for investors to wonder how bad things might get. It was only a few short months ago that optimism was at all-time highs. Indeed, I have never seen such a rapid swing in investor sentiment in my 23-year career. With the pain of the Great Financial Crisis of 2008 still fresh in investors’ minds, many people assume another GFC may be looming.

There have been 11 recessions (two consecutive quarters of negative economic growth) since World War II. The average stock market drawdown for the first nine of those was 24%. The last two (early 2000s & 2008-2009) averaged a 53% pullback. It is important to realize the last recession was the worst one we’ve seen since the Great Depression. Therefore, it’s not reasonable to assume that if the economy slows, even to the point of going negative, we’re in for another 2008 scenario. In other words, there’s no reason to build an ark every time it starts raining.

We still maintain that the odds of a recession in 2019 are low. Predictions get more difficult the further out you go, but even if we knew there was a recession coming in 2020, history informs us getting out of the market beforehand would probably mean giving up meaningful returns. On average, the stock market goes up 41% the two years before a recession begins, and 23% twelve months prior.

Trying to time the market presents enormous risks. As history demonstrates, one could be stuck on the sidelines for years, missing out on significant gains. The fear of missing out (“FOMO”) can become overwhelming, causing investors to capitulate on their bearish outlook, buying back in at a higher level only to then be whipsawed. On the flip side, even if the market continues to fall while an investor waits on the sidelines, eventually they will have to decide when to redeploy. Unfortunately, many investors who sold in 2008 didn’t get back in for many, many years, doing permanent damage to their long-term wealth.

With all of that said, rest assured that we’re monitoring events carefully. Should our base case scenario – that a recession is unlikely – change, we will take decisive action by repositioning our portfolio allocations to be more defensive than they already are.

Next week, we will be looking forward to more guidance from the Federal Open Market Committee (FOMC). As of now, the fixed income markets are assigning greater odds of a rate cut than a rate hike for 2019. Barring any unforeseen change, we expect the Federal Reserve to reassert itself as data dependent – thus pausing its rate hike campaign and mitigating their efforts to normalize interest rates. This should be seen as good news for risk markets.

Data deck for January 7-11: