Reviewing Economic Data & Underlying Signals of 2022 and Past Recessions
May 9, 2022
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this week. My name is Darrin Cohen, and I am the CEO of Wealth E&P.
Last week was a tumultuous week in the market, which was largely driven by a wild increase in the Fed Funds Rate; this was the largest increase in 20 years. We saw the market go both up and down 3% in the same week. This ended with the S&P down less than 0.25%, while the Nasdaq was down about 1.5% significantly.
So, you've heard us repeatedly talk about the economy being in good shape, and hearing that we don't see a sign of a recession. I’m sure it sounds like we're kind of nuts, especially with the market being as tumultuous as it has been lately. I wanted to point to some data that comes to us from ClearBridge Investments, which is a great firm that does some research on the anatomy of a recession. They update this chart monthly, so we’re waiting for the April numbers to come in.
As you can see above, we still see an overall sign of green. I was actually at a conference last week where ClearBridge spoke, and they said it's even still green at the end of April; they did see some minor adjustments down.
If we put that into comparison, looking back at the last eight recessions going back to 1970 or 2020 around COVID-19, you can see above that the overall signal was yellow or red every time that we were in or heading towards a recession. Right now, it is still very green. You can see the breakdown between consumer, business, and financial variables, and we see green across the board. Individuals are in great shape making money, earning, have jobs, are seeing wage growth, saving money, have less debt than ever, and corporate America is seeing large scale earnings again. What does this mean? This is telling us that we need to be careful about overreacting to the current conditions and fear that's in the environment now. We are making adjustments and de-risking in our models, however, we don't want to overcorrect.
Above is a ClearBridge Effects of Panic Attacks on Average Investors chart that is going back from 2001 to 2020. While the stock market was up 7.5%, the average investor earned just a hair under 3% during that period. We've seen this for up to 70 years: historically, the average investor underperforms by about 4% to 6%. The reason is not because of fees or bad investment selection, but it's actually because fear and emotions get in the way. As humans, we tend to want to sell when things look bad and when the market is actually about to go up. So, it's important that we use fundamental economics and real metrics or data to make these decisions.
If you have any other questions about this topic, if you want a risk profile, or if you would like a retirement projection, please feel free to reach out or visit www.wealthep.com. Otherwise, stay tuned for our Market Minute next week!
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