Quarterly Update
We have discussed growing market uncertainty in our recent newsletters. The tumult can be traced to various underlying political and economic influences, including Brexit, an inverted yield curve, tensions with Iran, and a contested Presidential election year approaching. However, the most common question we have gotten from clients is, “How likely are we to see a recession soon?”
It’s a tough question to answer, even for economists who spend their whole lives studying market behavior. As you know, we can’t predict the markets, but what we try to do is prepare for and guard against downturns. We have been making changes to our portfolios over the past year to protect hard-earned gains, but before we dive deeper into those changes, we first wanted to talk about what a recession is and hopefully ease some fears around that term.
The most recent recession in 2008-09 was unusually long and harsh, and the one prior to that occurred eighteen years ago, so when the topic comes up, most of us think of The Great Recession. But in broader terms, a recession occurs anytime an economy stops growing and starts to shrink instead. Some define it as two consecutive quarters when the value of goods and services produced in a country, known as GDP or Gross Domestic Product, declines. Others point to the inverted yield curve, which we discussed in our April newsletter, in which investors prefer to own short-term Treasury bonds to long-term ones, which traditionally signifies a lack of confidence in future economic performance.
We have seen an unusually long and steady growth pattern since The Great Recession, so it makes sense that the word itself makes people wary. But the majority of recessions since World War II in the USA have lasted less than a year, as opposed to the year and a half duration of The Great Recession, and have been followed by a return to economic growth. Eleven recessions have occurred in the seven and a half decades since the end of World War II, coming on average every seven years.
Another question to answer is, how badly does a recession affect the stock market? Our friends at Blackrock put together an interesting graphic (below) showing performance during each recession since 1929. The main takeaway is that not all recessions are created equal, and the 2008-09 recession was the worst on record since 1929-33. In many cases, what we call a recession actually mimics regular market volatility. For example, if you take a look at the 2001 recession, the S&P 500 dropped by 0.9% in six months, while the S&P 500 in the last quarter of 2018 dropped significantly, which led to a -6.24% return for the year. However, year to date the S&P 500 is up over 19%.
The importance of a well-diversified portfolio as you get closer to retirement is borne out by the chart, which shows that while an all-stock portfolio lost 25% in 2008-09, a moderate risk portfolio with 40% fixed income exposure lost only 11.5%.
As we mentioned before, we cannot anticipate when the next recession will arrive, but we are doing our best to prepare you for it. We regularly review the risk level in all our client portfolios, and for many clients, it is time to change to a less aggressive model with more fixed income exposure. This is one way we can protect hard-earned gains, particularly for retired clients. However, on an overall basis, we have made changes to all our core models. When it comes to our stock exposure to large companies, we have shifted slightly away from “growth” companies whose performance is more volatile, and more toward “value” companies that that tend to hold up better in an economic downturn. In addition, we have made moves to increase the quality of bonds we hold in our portfolios by adding more stalwart U.S. Treasury bond exposure.
On a more personal note, we are delighted to celebrate our one-year anniversary at Horst & Graben. While our first day in the new office was September 3rd of 2018, we started the firm in July. It was a real leap of faith that started us from square one and required new commitments from each of our clients, and we have been so grateful for the support we have received from you over the past year. In particular, I wanted to highlight the work of Megan Richardson, who has worked with us for four years as of this coming September. Some of you may have spoken with her on the phone or via email or met her in person. A Portland native, she’s an infamously prolific baker and devoted “pet mom,” and she’s a core part of the team, managing everything from our financial planning process to all of the firm’s technology, and we wouldn’t be able to do it without her.
If you have or know kids who are late high schoolers or early college students and would be interested in a personal finance seminar, we will be hosting a Saturday workshop in August that was put together with the help of our summer intern, Jordan. She is a Portland native and rising senior at Hamilton College in upstate New York. Planned topics include credit cards, student loans, starting to save and ways of doing so, and how to buy a car. Invitations will follow shortly.
I find myself often telling clients about the open house we held in late September. Because we hadn’t asked for an RSVP, we truly had no idea how many people would show up, and were cautiously prepared to make small talk with a few clients who might show up to be nice. In the end, at least a hundred people crammed into our office, talking with old friends who are also clients and meeting new people. What a humbling experience for our team here – that was the first night this new company felt real and vibrant, and it had nothing to do with us. It was all you.
As always, please feel free to reach out to us with anything you might need. We wish you a relaxing and enjoyable summer.