Truth is stranger than fiction; perhaps nowhere is that truer than in the financial markets.
For the past 12–18 months we’ve seen headline after headline warning us of the impending recession. In February 2022 inflation was high and Russia had just invaded Ukraine. These two countries are very important for global energy and agricultural markets. The experts on TV said inflation was only going to get worse. Every time inflation spiked 5%, a recession followed.1 Thus, in March 2022, the Federal Reserve began attempting to tame inflation by raising interest rates.
All the pieces were in place for a recession, and the financial markets were adjusting accordingly. US stocks fell -5.28% in Q1 2022, -16.70% in Q2 2022, and -4.46% in Q3 20222. These 9 months of losses had investors believing more losses were coming. Meanwhile, headlines kept predicting more pain to come, especially as the debt ceiling issue loomed in the distance. It would have been easy to reduce your stock exposure to avoid further losses and then buy back in at lower prices.
Yet truth is stranger than fiction. US stocks rose 7.18% in Q4 2022, another 7.18% in Q1 2023 and now 8.39% in Q2 20232. Where did the recession go?
All the same people that knew a recession was coming are now trying to explain why it is not here yet. The one constant is that innovation continues to accelerate, and the future is inherently unknown.
For the past few years, there has been a lot of talk about cryptocurrency, web3, and the metaverse as the big technology changes to come. In the past few months, AI came rushing to the forefront and already is, or soon will be, changing the way many things get done. Our favorite way to illustrate this is to look at the 10 largest companies at different points in time. Eric is about to have his 23rd work anniversary. In 2000, when Eric started at GF, the top 10 largest companies looked vastly different than today. Just two of the companies remain in the top 10—Exxon and Microsoft—and one company even went bankrupt—AIG! (We’ve written about the 10 largest companies before: check out Why Investors Might Think Twice About Chasing the Biggest Stocks.)
Things change quickly and we cannot predict which companies will make it into the top 10 in 12 months or 10 years, when stocks will rise or fall, or if a recession will happen in the next 6 months. This is true even when all the evidence seems to be making it completely obvious what will happen next. Thus, our advice is to stay the course. Continue with a well-diversified portfolio of stocks and bonds that makes sense for your personal situation and aspirations, adjusting only when things in your life dictate a change.
As always, we are here to help you. Please don’t hesitate to call or email at any time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
2. Russell 3000 returns, LPL Daily Performance Report