Looking Across the Valley

a note from Bob on April 29, 2020

News broke this morning that we were all anticipating – the economy shrank 4.8% in the first quarter. This should be a surprise to absolutely no one. I want to share with you my perspective on this news and what you may want to focus on as you digest this information.

A recession is two consecutive quarters of negative GDP. As I write this on April 29, 2020, we can confirm that we have one quarter already in the tank. It is widely believed by just about everyone that we are going to have a recession. And, the referee that gets to call a recession is the National Bureau of Economic Research (NBER). I fully expect that on or about July 29, 2020, the NBER will make it official – we are in a recession!

But wait, this is about to get more interesting.

You all know that a recurring theme of mine I like to share is the stock market is a forward-looking market – it is a leading indicator. According to research by Legg Mason, over the past 80 years, the stock market turned up on average 107 days before a recession ended.

So, I hope the calendar in your head is turning pages right about now (If you are reading along, take a moment and pull up the calendar on your phone to follow this). For a recession to be declared, we need to wait until about July 29th. If the recession lasts only two quarters, it will only be declared over once we have returned to positive GDP growth. The very earliest that could happen would be the third quarter, which ends September 30th. So looking at your calendar, if we have a two-quarter recession, the earliest we would know it has ended would be on or about October 31st (Halloween!).

Let’s go back to the Legg Mason data and apply it to the last recession we had, which was the financial crisis of 2008-09. The stock market bottomed out on March 9, 2009, with the S&P 500 hitting 677. By June 30, 2009, the S&P 500 was already at 919, up 36% from the trough.

Wait, it gets even better. The recession did in fact end on June 30th but it was not until September 21st that the recession was actually declared over by the NBER. And where did the S&P 500 close on September 21, 2009?  1,065 – an increase of 57% from the trough.  Ouch.

So if there is an investor (and I use that term loosely) who says, “ I want to wait for more clarity” or “I need to see confirmation that the worst is over,” I say “Good luck my friend.” You are now a market timer and no longer an investor. In the words of Nick Murray, “Other than by sheer luck, no one catches the bottom – not at least because we won’t know it was the bottom until we’re well past it.”

Please don’t misunderstand my message – I am not predicting a recession; I am not calling for a recession that last only two quarters. In fact, I am not predicting anything – I never do. The virus and the resulting slowdown in our economy is serious, and we may have lingering effects for quarters to come.

All I am saying is that our most critical mission at Doyle Wealth Management in these troubled times is to get (or keep) investors looking across the valley. The shape of the recovery (be it V-shaped, U-shaped, or even L-shaped, whatever that looks like) is both unknowable and irrelevant to the long-term, goal-focused investor. All that should matter to him/her is the inevitable fact of the eventual recovery.