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Every time we had a spike in inflation above 5% – it was followed by a recession other than 1 time in the last 70 years.
WHAT IS A RECESSION?
A recession is technically defined as 6 months – or two back to back quarters of negative growth.
HOW DO WE MEASURE GROWTH?
Growth is measured by the GDP – the gross domestic product which you can also find here: https://fred.stlouisfed.org/series/GDP, you can see the most recent recession – started in Q1 of 2020, there was a dip in growth, and then a huge dip in GDP in Q2 of 2020 which officially made it a recession.
WILL THERE BE AN ACTUAL RECESSION?
Check this out: https://fred.stlouisfed.org/series/CP… going back as far as the 1950s, anytime we’ve had an inflation reading above 5%, we got a recession which are those grey columns in chart above.
WHAT IS INFLATION NOW?
Inflation is nearing 7% right now which means based on historical evidence, there’s a good chance we’ll get two consecutive quarters of negative GDP growth.
HOW DOES THE STOCK MARKET DO IN A RECESSION?
That’s the real question! We’ve had 30 recessions between 1869 and 2018. Now of those 30, 16 recessions have had a positive stock market return from when they started – to when they finished.
The positive stock market recessions lasted on average – 16 months and stocks ranged a return between 0.7% to 38.1% with an average return of 9.8% despite the fact that the GDP declined on average 3%.
HOW IS THAT POSSIBLE?
They found the correlation between recessions as measured by the GDP growth and the stock-market at nearly -0.05. So it’s almost 0 correlation between a recession and the stock market. The 14 recessions when the stock market went down, lasted 18 months on average, with an average return of -14.2%.
SHOULD I SELL ALL MY STOCKS?
In order to beat a buy-and-hold return of 9.0% over the last 150 years, an investor would have to successfully predict 77% of the market turns —and move in and out of stocks/cash as appropriate (Russell Investments: https://russellinvestments.com/us/blo…).
Even if you knew for sure when a recession was coming, the odds of losing or making money is about 50/50.
History says it’s nearly impossible to time the market.
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