Should you buy stocks with an impending bear market and possible recession?
A rally late Friday avoided what seems inevitable. If current trends continue, at some point the market is likely to enter bear market territory for the S&P 500, defined as 20% or more below the previous high.
While many cross-currents are driving the current sell-off, the proximate cause for the recent acceleration in the stock decline revolves around concerns about the US consumer. Walmart (WMT) and Target
Looking at the results of both retailers, the reality is that both reported higher revenue (sales) compared to last year’s sales quarter, so the consumer continues to spend. That being said, all was not well as both reported lower incomes. For the first time in the post-covid period, retailers have been stuck with excess inventory. Costs due to inflation also weigh on their income. Finally, it seems that the low-end consumer is feeling the impact of the price increase.
Beyond profits being necessary for individual businesses, the consumer is primarily the engine of the US economy. Our forecast for the likelihood of a recession over the next 12 months is increasing, but it does not look imminent. The labor market, household balance sheets and corporate balance sheets remain healthy but may have peaked.
The stock market is not a precise economist; stock market declines have historically predicted many more recessions than the United States has ever experienced. Although the stock market did not predict every recession, the stock market tends to decline before a recession and, more importantly, to rebound strongly before a recession ends.
While all of this is unpleasant, once stocks are down 20%, futures returns have been better than average for bear markets since 1946. In most cases, even in a recession, stock prices shares are higher in the following three months and one year. . As expected, the short-term rebound in bear markets that are not accompanied by a recession is more pronounced, with a median gain of 11.7%. If a recession does not follow the bear market, stock returns in the three months following a 20% decline have been positive in all example!
Investors should always focus on an asset allocation that provides the financial means to persist despite volatility and economic downturn. In addition to holding safe and liquid assets to cover living expenses in the event of economic and market turbulence, this downturn should be a long-term buying opportunity for those able to increase their equity positions. The market clearly can and probably will go down, but the bounces off these downs are usually sharp and unpredictable in their timing. Holding a safe reserve of living expenses, an average cost buy program, or mechanical rebalancing toward an asset allocation target can help address the fears investors face during these times.