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Investing During Grim Economic Times Thumbnail

Investing During Grim Economic Times

We have already discussed bear markets and recessions in "Bear Markets and the Threat of Recession: What You Need to Know" and "The Swiss View: Recession-Proofing your Portfolio," but with inflation remaining incredibly high in the U.S. and some other major economies around the world, we find it prudent to continue discussing investing when a recession is about to hit. It is important to note right from the start that trying to time the market seldom works out well. This makes it quite important to ensure that you are focused on the long-term, something we will get into a bit later.

Context To A Coming U.S. Recession

To set up our topic today, there are a few indicators to look at to give context to what the markets and the economy are doing right now in the United States. The U.S. Consumer Price Index (CPI), used to calculate inflation, rose 0.4% in September, bringing it to 8.2% year-over-year according to the data released last Thursday. Furthermore, core inflation - the U.S. CPI less food and energy - rose 0.6% in September, which brings it to 6.6% year-over-year, a new 40-year high.3
Our managing partner, Urs Vrijhof-Droese, had this comment on the inflation situation: "The ongoing upwards pressure on inflation, in combination with better-than-expected unemployment numbers last week, will give the Fed confidence in moving forward with their hawkish monetary policy. Of course, this is not good news for the markets. Nevertheless, looking at the numbers in table A (see below), there is some hope that the price pressure in some areas, particularly energy, is starting to ease."

We see the signs of a U.S. recession despite low unemployment rates because the FED will need to continue its hard action in trying the bring inflation down. 

Investing Before A Recession 

A strong stock market performance will benefit investors the most if one invests in the low point of a market dip. However, timing the bottom of a market is nearly impossible, and trying to time the market, in general, is an incredibly difficult task. Therefore, a long-term approach is vital to growing wealth sustainably and effectively. It will help to guide investors through the due diligence of finding businesses with exceptional business models and solid financial structures/performance. With a long-term approach, one can select investments that will preserve the capital being invested and grow one's wealth with the least amount of risk possible.

For example, if we look back at the last two historic recessions of 2007-09 and 1990/91, there is a clear picture showing it is time in the market, not timing the market, that leads to success. If investors had placed an investment in the S&P 500 index fund at the worst possible moment in 2007 - the market's peak before the financial crisis began - they would have achieved an 8.4% annualized return in the 13 years following. If they had bought in at the highs before the 1990/91 recession, their investment would have achieved a 9.8% annualized return in the nearly 30 years since.This example is just one of many that show the benefits of investing in the long term rather than timing the market. There was clearly short-term pain, but it would have generated a substantial return in the long term despite poor market timing. 

It is important to understand what motivates you as an investor and how fear and greed affect your investment-making process. Often investors panic when the market begins to tank and realize losses that may have recovered if they hadn't sold. Unfortunately, because their fear of loss became too powerful, a poor choice was made, and the financial hit became a reality rather than waiting for the markets to recover. Important note: there are certain cases when selling an investment at a loss may make sense. However, before making any investment decision, you should consult your investment advisor to ensure an informed decision is made, not an emotional one.

Seeking professional help can be a suitable mitigation tool for you, as your asset manager will be able to put emotions aside, put the investment into perspective, and help guide you through tough times.

Investing During A Recession

So now, for the sake of the blog, let's imagine we are in a recession - it is a current debate whether the U.S. is actually in one now - and you are wondering what kind of investments present a good opportunity. There is quite a bit of due diligence needed when selecting a stock investment, as there are many considerations to take into account. A few of these considerations are what is the business model of the company, does the business generate enough cash flow to support the company through hard times, do they have a history of high debt levels, what risk factors are presented to the company from their competitors and controlling government, and are there other factors that will affect their business. These considerations will help you determine if a company may be able to make it through the recession, recover well, and add value to your portfolio in the years after the recession.

In the current economic environment, some interesting opportunities do present themselves. First is that after decades of the USD losing value, it has strengthened against some of the other currencies around the world and yet has high inflation attacking the USD's value simultaneously. This can present a challenging situation, but it comes with opportunities, such as diversifying a portfolio into other currencies that are not experiencing high inflation at a favorable exchange rate. Inflation has been eating at the value of the USD ever since the late 1950s. While Switzerland has had inflation, it has dealt with it to a far lesser degree, as seen in the graphs below.1&4 

The question then becomes, what to do with the Swiss Francs that have been converted? The good news is many investment options exist in the Swiss economy due to its strength as a global market participant and an island economy in Europe. While the U.S. economy (GDP) has been shrinking in 2022, the Swiss GDP has been growing. It shows a country that, despite hard economic times, has been able to handle the global challenges well and grow despite them. The Swiss economy helps the companies based in Switzerland focus on solving the issues they are facing from outside the domestic economy, giving them a competitive advantage in the global market.  

Diversification is key for any portfolio, and looking for a suitable way to not only diversify in terms of sectors but build a portfolio that is globally diversified is challenging because not all economies are the same, and business models that work in the U.S. may not be sustainable in other economies. When investing offshore for diversification purposes, it is important to seek a professional to ensure you have a partner with the right specialization. In this case, an SEC-registered Swiss asset manager would have the knowledge to understand American clients' needs and the expertise to understand the offshore market and what investment would fit a client's overall portfolio. 

Manage Expectations

In tough economic periods choosing the correct investment is important, but the most valuable thing is to avoid poor investing behavior. Never try to time the bottom of a market because, as noted before, timing the market is a losing battle. Nobody knows when the market will hit bottom, so invest in stocks or funds you want to hold for years, even if the market continues to fall in the near term.2

Do not panic sell just because your stocks went down. One thing that's extremely important to avoid during recessions is panic selling when stocks fall. It is in our human nature to avoid volatile situations -- you might be tempted to sell "before things get any worse," but this may cause more harm than good, and your investments will fall prey to your emotions. It is important to seek help sooner rather than later when in doubt or when moving into an area of the market you do not fully understand.

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  1. https://www.worlddata.info/europe/switzerland/inflation-rates.php
  2. https://www.fool.com/investing/how-to-invest/what-to-invest-in-recession/
  3. https://www.bls.gov/cpi/
  4. https://www.worlddata.info/america/usa/inflation-rates.php