The Truth About the Next Recession


Dave Gilbert here, Editor of Smart Money.

I hate to kick your week off with the dreaded “R” word, but it has to be addressed: A recession might be coming.

… Or it might not be. The odds of one are all over the place – everything from just a 23.07% chance by next September according to Statista, to a 96% chance according to the Conference Board, an economic and finance platform.

Throw in a gut-wrenching bear market for 90% of the year, and no wonder folks are afraid and confused.

The truth is that things are rarely as bad as we fear they will be, and that is the case with investing during recessions.

This might make you feel a little better should the recession chatter continue to increase…

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Better Than You Might Think

Most of 2022 has been no fun (understatement of the year, anyone?), but as Eric Fry says so well…

Let’s acknowledge the obvious: Bear markets are miserable events. They are painful, gut-wrenching, and anxiety-inducing.

If an infallible clairvoyant could tell us in advance, “Your portfolio’s value will plummet 30%, then recover and soar 400% over the ensuing five years,” most of us would endure the trauma without much anxiety.

But that’s not what happens. Instead, we worry that 30% drop will become a 40% drop or more. The good news is that high-growth stocks operating in high-growth trends can recover quickly from wicked selloffs faster than ordinary stocks. Moreover, their rapid growth usually enables them to compound their gains faster than ordinary stocks.

But that’s not what happens. Instead, we can never know if a 30% drop will become a 40% drop, or even a 50% drop. Nor can we know how soon it will end or how many years we must wait to see our stocks hit new all-time highs.

That’s the bad news.

The good news is that powerful megatrends rarely end quickly… AND they can produce investment gains, even when the overall stock market is going nowhere.

That’s the biggest picture of all, which is Eric’s macro approach to investing.

Those transformative trends may slow down during bear markets, but they continue to play out underneath the surface and are better positioned to make money in the long run.

But even in a recession – which you would think spells guaranteed disaster for stocks – history’s lessons may surprise you.

In fact, stocks can even move higher during recessions. This data from Hartford Funds shows that stocks advanced during seven of the 13 recessions since 1945.

a chart showing stock performance in recent recessions. the dates range from 1945 to 2020, with performance ranging from -24.17% to +27.56%

The overall average for the 13 recessions since 1945 is +3.7%. Of the seven when stocks were up, the average gain was 16%. And of the six when stocks lost ground, the average was -10.7%.

What’s more, the market is often higher – and sometimes a lot higher – by the time a recession is “officially” declared over. That’s the rearview nature of recessions, and investors never want to look in that mirror.

The “official” call as to whether the economy is in recession belongs to the National Bureau of Economic Research. NBER uses trailing data, so recessions can only be declared in hindsight. By the time a recession is identified, both the economy and the stock market may have already been through the worst of it and could even be turning around.

Just look at the most recent recession in early 2020 when COVID-19 emerged and much of the nation – and the world – shut down. The NBER said that recession lasted from February to April 2020, making it the shortest recession on record. They made that declaration on July 19, 2021… more than a year after the fact.

Anyone waiting for official word to get back into the stock market missed one heck of a rally.

a chart showing that, after the recession ended in April of 2020, the end of the recession was actually declared 15 months later (source: YCharts)

The folks at Bespoke put out interesting data that looks like a bit of a silver lining. They calculated that the S&P 500 has fallen more than 20% in the first half of the year eight times since World War II. It is up both six months and one year later every single time, with the average six-month gain a solid 21.5%.

A chart showing the 20%+ two-quarter drops for the S&P 500 after WWII

We’d take that, wouldn’t we?

There are no guarantees, of course. We all know that. Which is why Eric focuses on those megatrends…

Because megatrends can power extraordinary growth, the stocks that benefit from these trends usually recover from wicked selloffs more quickly than merely ordinary stocks. Moreover, as megatrend stocks recover, their rapid growth usually enables them to compound their gains more quickly than merely ordinary stocks.

Obviously, identifying a truly powerful megatrend is not a simple task. But I have repeatedly identified and underscored the key megatrends that inspire most of my recommendations. The list would include…

  1. Battery-metal demand growth…
  2. Worldwide 5G deployment…
  3. Energy’s “swan song”…

… I continue to expect all of these megatrends to reward investors over the next few years. The rewards may not bit be immediate, but I expect them to be substantial.

If you know Eric, you know that statement is neither a feeble hope nor powerful self-delusion.

“It describes an ageless stock market tendency,” he says. “Success compounds.”



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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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