Is a Recession Coming?

The financial media has lots to say about a looming recession – should you be listening?

2019 was a year of strong returns for global markets and investors who were well positioned with globally diversified portfolios reaped the rewards without fear of missing out. Did to the financial media pundits congratulate the disciplined investors who stayed in their seats after a painful end to 2018? Of course not. That doesn’t sell magazines or subscriptions. Headlines that incite fear and anxiety do.

The common theme these self-titled “experts” hammered on this year was the imminent threat of recession. Are they completely wrong? Not entirely. Let us explain.

There will be another recession – that part is truthful. Wait! Stay with us. The key difference is no one knows when it is going to happen, how long it could last, or what the impact will be. It could be tomorrow, next month, 3 years from now. It could last a month, or it could last 2 years. Markets could fall 5%, or 40% before leveling off…You get the idea – it can’t be predicted. So, what does all that mean to you?

It is important to note that these events are neither unexpected or unusual; recessions are a normal part of a market cycle. They represent two periods of consecutive negative GDP growth, but an investor may associate it with a larger economic crisis. What they really represent to you – the investor – is a period of volatility in which your investment values can fluctuate, sometimes greatly. The key question is: why shouldn’t you reduce your exposure to this uncertainty? Why shouldn’t you sell your equities?

Let’s explore how markets have responded after significant financial crises or global events.

The Market’s Response to Crisis
Performance of a Balanced Strategy: 60% Stocks, 40% Bonds (Cumulative Total Return)**

As the chart shows, the disciplined investor who weathered these periods of heightened volatility and uncertainty has been rewarded for doing so. We don’t want to hide the fact that recessions can be painful. We understand how hard you have worked and are working to reach your financial goals. But here is our challenge to you: rather than basing investment decisions on the financial media’s predictions of which way bond or equity markets are headed, tune out the noise and take solace knowing that you’re well positioned to handle these moments. Last year, this year, next year – that approach is a timeless one.

Principles worth repeating

When the media ramps up their noisy efforts in 2020, be it around the US election or some other event, we ask you to remember these principles:

1. We are long-term investors, working steadily toward achieving our lifetime goals. We make absolutely no attempt to forecast the global markets.
2. The benchmark we should be most focused on is the one that indicates whether you are on track to accomplish your financial goals.
3. We believe in diversifying across markets and asset groups to manage risks and pursue higher expected returns.
4. We stay disciplined and maintain a long-term perspective, no matter how bumpy the ride can feel at times.

** In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Marketwide Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% Citigroup World Government Bond Index 1-5 Years (hedged), 10% Citigroup World Government Bond Index 1-3 Years (hedged), 10% BofA Merrill Lynch 1-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup Indices used with permission, © 2017 by Citigroup. Bloomberg Barclays data provided by Bloomberg. For illustrative purposes only. Dimensional indices use CRSP and Compustat data. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Rebalanced monthly. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See Appendix for additional information.