2022 has been one of the most difficult years, possibly since the early 1980s, for investors. Investors can be left feeling worn out and defeated along with the professionals that are doing their best to help them make sense of the volatility. The questions about what has happened in the recent past are important, but questions about what is most likely ahead is even more critical.
This year has been challenging. With exception of commodities and the US Dollar (relative to foreign currency), There has been no place to hide in 2022, which is unusual for most investors who have been taught for so long that diversification is going to make all things better. Unfortunately, this market has been difficult to navigate.
The leadership or losses have moved around dramatically some months, with July being an extreme case where markets rallied strongly, only to remain volatile and disappoint in August. Thankfully, these types of years are not the norm!
The question remains as to what may happen next. Much of the flip-flopping in the market has to do with investor expectations for the economy and inflation. Whether we are in a recession, or likely going to be in a recession has taken over many of the headlines and conversations between investors and advisors.
Back in the Spring, Ned Davis Research put out a checklist of pre-recession “must haves.” This can be helpful because the definition of a recession is a trickly thing for many people to define. In all reality, economic recessions are “declared” by the National Bureau of Economic Research (NBER). They do not lay out a map to how exactly they determine recessions, and therefore, market research firms like Ned Davis Research, are left to examine historical coincidental and precursors that seem to coincide with NBER declared recessions.
Recessions are something investors are very concerned about because they coincide with economic contraction. Here is a checklist of things Ned Davis Research has identified as a possible path and timeline for recession based on their historical studies of data. Many of the items on the list are being checked, despite realizing that the timelines in the checklist are not absolute.
Where does that leave us? Recessions are particularly challenging to predict with precision and it can be tricky to determine the difference between a bear market and a recession at times. However, the data does seem to indicate that we may be headed that way.
One thing to note on the Ned Davis Research checklist is the peak in the stock market does tend to come closer to the beginning of a recession and that could possibly mean a rally prior to the beginning of recession. However, caution is recommended for anybody who is trying to time this perfectly because as the first table indicates, it can be a tricky situation!
Despite all the whipsawing and challenges, remaining sensitive to data and adjusting is probably better for most investors than guessing what might happen next. It is a disciplined approach even though it does not always feel good. No economic environment lasts forever, and data is less likely to lie over the long-term than feelings. Neither is perfect and emotions are real, but data always ends up telling the truth sooner or later.
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