Taking Stock - Playbook for a recession
Date: 04 July 2022
September 2007. Concerned savers queue up outside the Northern Rock Bank on Northumberland Street in Newcastle, holding bags to carry away the cash they thought they might lose if the bank went under. I remember this because I was there, a second year law student out for lunch*, pretty oblivious to the situation. I became less oblivious when I had to look for a job a few years later.
A lot of scars remain from the Great Recession, but the regulations that came into place over subsequent years forcing banks to hold more capital, leave us, in my view, far less likely to see a similar scene repeat. The financial system looks to be in a better place to weather the next slowdown.
And it increasingly looks like one is coming. Rising prices and the very real impact on our day-to-day lives are starting to show up in the economic data. I’m not going to add to the debate here as to whether we are headed for a recession, for the moment let’s just assume that we are. What can we as investors learn from history?
Well, as a starting point, bonds tend to do better than stocks during a recession. Not necessarily a surprise, when you are in the trenches return of capital takes precedent over return on capital. So, should we just go long bonds versus stocks? Sadly, it’s not that simple – as ever the key is timing.
|
Recession Start Date |
Recession End Date |
Equity Market Performance |
Date of Equity Market Bottom |
|
30/11/1969 |
30/11/1970 |
-6.7% |
30/06/1970 |
|
31/10/1973 |
31/03/1975 |
-17.7% |
30/09/1974 |
|
31/12/1979 |
30/06/1980 |
11.7% |
n/a |
|
30/06/1981 |
31/10/1982 |
-1.8% |
30/07/1982 |
|
30/06/1990 |
28/02/1991 |
1.9% |
28/09/1990 |
|
28/02/2001 |
31/10/2001 |
-16.1% |
21/09/2001 |
|
30/11/2007 |
31/05/2009 |
-36.8% |
09/03/2009 |
|
28/02/2020 |
31/03/2020 |
-13.2% |
23/03/2020 |
Equity Market Performance is MSCI World in USD terms
Recessions are US Recessions
Source: Quilter Cheviot
Pain in the stock market historically ends before the recession does. This, as we know, is because the market represents an amalgamation of global investors’ views about the future – not what is happening today. If you wait for the end of a recession before switching back to stocks, you have tended to miss out on a substantial chunk of the market’s recovery. Consider also that a) we only find out that we are in a recession months after the fact; and b) GDP figures eventually end up revised anyway, more often than not. For all we know we might already be in a recession but trying to time an economic turnaround in the market is nigh on impossible.
So, what can we do as investors? Well, we can try to prioritise investing in companies which sell the goods and services that people desperately want, or ideally need. This is a tough job again because it has been so long since we have been through a prolonged economic slowdown to test what consumers actually prioritise. The Covid-19 recession is not a good guide because
- a) we were all stuck at home and could only spend money on certain things and;
- b) the amount of fiscal support provided by governments meant that consumer savings went up, rather than down as is the usual course of events during a recession.
Think of all the companies and products which were not around fourteen years ago but are now well established.
When money is harder to come by do people continue to take Ubers?
How many folks cancel their Netflix subscription?
Will people still spend the thick end of a grand on the new iPhone?
What you may think of as priority spending will probably differ a lot from what I and others prioritise – investing is difficult.
Companies have a real balance to strike at the moment. To what extent can they pass on rising costs to their consumers without seeing a fall in sales? I look at my monthly outgoings and the shift to spending on subscription type services is obvious. As I write this, I have just received an email from the company that I pay for recipe boxes each week to say they are introducing a delivery charge. This same conversation is happening over and over across industries. We are about to find out how sticky these subscriptions are, both at the consumer and corporate level.
Nothing tests an investment thesis like a slowdown. Sustainability of earnings is a real area of focus for us as Investment Managers at the moment. A business that can maintain earnings growth during the coming period will likely be disproportionately rewarded by the market. During the next twelve months or so it will become obvious which companies actually have a competitive advantage, and which were being swept along by an era of cheap money.
Thank you for the feedback so far, it is really valuable and appreciated. A reminder that if you want to get in touch with me directly, you can do so here.
Have a great week.
*Frankie & Tony’s sandwich bar, legendary student haunt – still there as far as I know.
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