Predicting an economic recession tends to be a fool’s errand, as some of the brightest minds had predicted the chance of a US recession to be 100% chance last October in the next 12 months. We are 13 months past that prediction with no recession in sight.  US GDP actually increased 4.9% in Q3 2023.

So what do economists think now about the odds of a recession? As of September, the estimates for a recession in the next 12 months are at 46%, which is down from last year’s high of 65%.

(Source: Bankrate)

Despite the declining odds, the key takeaway here is that relying on these forecasts as absolute truths is not advisable. A recession will inevitably occur, as it historically has, whether it happens next year or in five years. While we refrain from making specific forecasts, we aim to offer insights into how major asset classes tend to perform during a typical business cycle.

The following chart outlines the performance of stocks, bonds, and cash over the entire business cycle since 1950. The tan bar represents performance during a recession. Historically, stocks exhibit poorer performance, bonds tend to rally, and cash typically remains relatively stable, consistent with its behavior throughout a business cycle.

(Source: Fidelity Investments)

Analyzing this, we discern two crucial observations. Firstly, bonds are currently undergoing their most significant drawdown in history, primarily due to rising interest rates. Although bond yields are higher, their returns will only normalize once the Federal Reserve pauses. If rate cuts occur, their performance is likely to improve further, given that rate cuts typically accompany recessions, making bonds the top-performing asset class in this context.

The second noteworthy point is the sharp upswings in stock performance at the onset of the business cycle. The extreme example of this is vividly illustrated in the 2020 recession, where the S&P 500 plummeted by 33.9% from peak to trough. Following the briefest recession on record, the S&P experienced a remarkable rally of over 70% from the March 2020 lows to the year’s end.

Predicting the timing of a recession and its subsequent recovery poses a formidable challenge, even for seasoned economists. Even if one manages to accurately time the onset, the ensuing stock rally during the next expansion is typically robust and swift, making it a crucial opportunity for investors not to miss. These considerations underscore the importance of maintaining a diversified portfolio, irrespective of when the next recession occurs.

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.