Regarding Bear Markets and Recessions

I realize that these times are scary. Volatility in the markets is inherently difficult, both on the portfolio and emotional cycle of investors. Recessionary fears are a common party conversation with discussions and debates over Federal Reserve interest rate changes, timetables, inflation, labor participation rates, and unemployment rates. Even, as I have witnessed, the opportunity to discuss our children living at home longer and without the work that they were promised as undergraduates.

Things to consider and keep track of include, mortgages, credit cards, pensions, social security withdrawal rates, interest income vs. dividends, capital gains vs. qualified income, tax-sheltered rates, annuitization, long-term care, irrevocable life insurance, 529 plans… I do this happily for a living and have been for 18 years now, but even my head starts to wander and I can only imagine yours.

However, I would like you to focus on the following:

  1. Interest rates have always and will continue to change. This is the law of a banking system based on the competitive design of credit. As one bank lowers rates to gather loans, the other will compensate with higher rates to collect deposits. Both banks hedge against the other with credit and mortgage products, leading us into an endless cycle. My first home was bought in 2007 with a mortgage rate of 7.25%, but now it is standing at 3.5%.
  2. Equity markets have historically reacted to a recession BEFORE it actually starts and rarely bottom before the Federal Reserve is done raising interest rates. We are in for another volatile year, but this does not mean we run and hide, freak out, or sell our investments. Missing the best days in the market has disastrous effects on a long-term portfolio, resulting in significantly more damage than missing the ten worst days.3.
  3. “Real Return” is a “Real Thing”. To put it simply, the real return is your investment return minus the inflation rate, also known as buying power. The real return for last year’s markets was somewhere between -27% and -23% (equity and fixed income).
  4. Back-to-back down years are rare. There have only been three instances since 1957 where there were back-to-back down years2. Double-digit down years occur, and even more common are double-digit “drawdowns” — a peak-to-trough difference in price within a calendar year.

In short, I understand that all this is frightening and I am here alongside you, investing in the same ways that you are. I am not a serial account checker so instead, I spend my time checking client accounts. These things are not unheard of, are rather common and frankly quite healthy. If your time horizon is long-term (more than 10 years), before you have to start withdrawing your funds, this should be seen as an opportunity. If you are retired, recently retired, or are looking to retire, hang tight. This is the reason we diversify holdings across asset groups and locations. This too shall pass.

As always, if you have any questions or need further service, please don’t hesitate to schedule a call.

Philip Clark, CPWA®, CFP®, CLU®| Director – Wealth Management
Direct: 626.788.3947 |



This information should not be construed as tax advice, nor should be taken as financial planning advice. Please consult your tax professional. These opinions are based on observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 03/08/2023 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.

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