08 Jul 2022
Investing
July 8, 2022 Dave Wigginton

Being able to zoom out and rise above the fray is an important ability/skill to hone and utilize. In the world of 24/7 information sharing, news, tweeting, blogging, etc…, it’s really easy to lose perspective and get caught up in whatever the flavor of the day, week, or month is.

For most of 2022, inflation has consumed headlines, magazine covers, financial media, and even conversations among regular, non-financial professionals. More recently, recession has become the topic of obsession. I have seen so many headlines from the various outlets I frequent as well as the curators I follow.

So, we may be in a recession, or we may not. How much does it actually matter? I know that question is naive and ignorant, but the reality is the S&P 500 is down nearly 20% year-to-date while the Nasdaq is down over 27% and the Dow is down over 14%. Would a recession portend deeper stock losses from here? Absolutely. How much more is uncertain. If we’re not in a recession, with the stock market bottom and start a new uptrend? Maybe. Maybe not.

Recency Bias

Many are expecting a deep and protracted recession like the last two we’ve had. I’m thinking a recession would be a sideshow to the Fed tightening cycle and elevated valuation levels across most asset classes.

The withdrawal of liquidity combined with a sharply rising USD is a recipe for lower asset prices in the US. There’s still quite a bit of downside to reverse the liquidity injections of the past couple of years, not to mention getting back to trend valuation levels. We may not completely reverse the liquidity induced rise or higher valuation levels, but will a recession right now have that much of an impact? If the entire economy shut down or the financial system was on the verge of collapse, then yes. However, if we have a garden variety recession I doubt it will have the impact many seem to be suggesting.

Remember, the largest drawdown in the postwar era happened from 2000-2002 in the Nasdaq (~78%). There was a recession during that period, but it was the mildest one of the postwar era. In other words, we don’t need a GFC- or Pandemic-like recession to feel substantial amounts of pain in our investment portfolios. The Main Event

Whether there’s a recession or not right now isn’t likely going to be all that important. The Fed reversing the tightening path it’s on will have a much more significant and relevant impact on the reversal of the downtrend in stocks we’ve been in all year. A recession may be the catalyst to cause the Fed to reverse course but don’t fool yourself into thinking that not having a recession will end the misery in asset markets this year. Whether you like it or not, the Fed and its proclivity to continue to tighten or reverse course and loosen monetary policy is the main event.

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