Are recession fears and the market sell-off overblown? The answer is typically yes. This is because while recessions are a normal function of an economic cycle, they are infrequent, and market sell-offs rarely lead to prolonged downturns.
Could the current environment lead to a recession and bear market? It’s always possible. But these periods are usually short-lived and less severe than we initially fear.
This article isn’t about promising smooth sailing in the short-term, but rather about reinforcing a key truth: over time, our economy and markets have consistently demonstrated resilience, adaptability, and a steady path forward.
While bear markets are unavoidable, bull markets are much longer with larger returns. Since 1956, the average bear market has lasted one year, two months with a decline of 36%. In contrast, the average bull market lasts 5 years 9 months and returns 192%.
Stock Market Bull and Bear Cycles Since 1956
The stock market has stumbled in recent weeks, with the S&P 500 and Nasdaq declining year-to-date. While tariffs have garnered the most attention, investors are also concerned about mixed economic signals including weak consumer confidence, hotter inflation, government worker layoffs, and more.
Some are now wondering if there will be a recession, and President Trump did not rule out the possibility in recent interviews. How can investors maintain perspective in this challenging market and economic environment?
To start, it is important to understand the difference between how individuals and households feel about the economy versus what drives financial markets. For example, when the prices of everyday goods and services increase, this can present challenges for our personal budgets. However, it may create potential opportunities in investments that can benefit from price increases. So, it’s important to remain objective and distinguish between our personal experiences with the economy and the factors that influence long-term investment returns.
Uncertainty around economic policy has increased
While the economy and stock market are not the same thing, they influence one another in important ways. When economic growth is strong, corporate earnings tend to grow which can boost share prices, and vice versa. Similarly, stock and bond markets can sometimes serve as a leading indicator for the broader economy since they reflect the forecasts of millions of investors.
This does not mean that the market is always correct. It’s important to remember that some investors and economists have been predicting a recession for nearly three years. Just a year ago, many believed a recession would be imminent due to inflation. Even academic indicators of recession, such as the “inverted yield curve” or the “Sahm Rule,” have not proven to be reliable this time around.
Instead, not only has the economy grown steadily in the past few years, markets have also performed well. Despite the current pullback, the S&P 500 has gained over 60% since the market bottom in late 2022, while the Nasdaq has risen 78%.
Of course, like a stopped clock that happens to be right twice a day, there will eventually be a recession. However, these examples show that predicting the timing of economic downturns is difficult. Investing based on the assumption of an economic downturn can lead to suboptimal financial decisions, which is why it’s important to build portfolios that focus on long-term goals rather than near-term uncertainties.
Why have recession concerns risen?
Historically, recessions occur when the business cycle enters its later stages, or an external shock takes place, such as a pandemic or financial crisis. The current business cycle has shown signs of slowing, but has not contracted just yet.
Instead, a possible trade war represents an outside shock to consumers, businesses, and global supply chains. Additionally, slower growth – or even two consecutive quarters of negative growth – are quite different from situations like the 2008 global financial crisis or 2020 pandemic shutdown.
The administration has said there may be a period of short-term “turbulence” in the economy. Even if tariffs do not directly harm growth, they have created an environment of uncertainty, as shown in the chart above. The administration has acted more swiftly with broad tariffs compared to President Trump’s first term, making the outcome harder to predict. Only time will tell if tariffs reach rates not seen since the 1930s, or if agreements with major trading partners will be reached.
It’s important to remember that tariffs are often used as a negotiating tactic for broader policy objectives. In the past, market reactions to tariff announcements were more dramatic than their actual economic impact. In 2018, the market fell as tariffs were implemented, but earnings growth was still strong and GDP was almost 3% that year.
While this uncertainty may be uncomfortable and has led to market swings, it’s in periods of economic strength that policy shifts can be most easily absorbed.
The economy has grown steadily despite investor fears
Beyond tariffs, the economic data is causing concern, including hotter-than-expected inflation and mixed jobs numbers. For example, the Consumer Price Index reversed course recently and rose above 3.0% for the first time since last summer.
Adding to this uncertainty, federal government jobs fell by 10,000 in February according to the Bureau of Labor Statistics, and more are expected. While federal workers account for less than 2% of the workforce, there is concern of ripple effects on the private sector and job growth overall. Despite this, the economy still added a healthy number of jobs in the latest report.
The price sensitivity of the consumer and their outlook on the job market have also worsened. Consumers now expect inflation of 3.5% over the next five years, the highest level since 1995, according to a University of Michigan survey. This has translated into feelings of deep pessimism about their financial situation in the next 5 years.
The irony is that markets have forgotten about the reasons for their post-election optimism: the possibility of pro-growth policies around manufacturing, energy, taxes, and regulation. As the chart above shows, consumer spending has driven the economy in recent years. Some economists hope that policy changes could boost business spending as well. An extension of the Tax Cuts and Jobs Act (TCJA) is currently being considered by Congress, and regulatory changes are in progress as well.
The S&P 500 experiences pullbacks on a regular basis
While the thought of a recession can be unpleasant, it’s important to remember that periods of slower economic growth are a natural part of the business cycle. Forecasts are not always correct, and even when they are, markets do not always behave in expected ways. While the past is no guarantee of the future, the market declines and subsequent sharp recoveries in 2020 and 2022 are recent examples of situations where markets can quickly change their tune.
Similarly, short-term market pullbacks are a natural part of investing. As the accompanying chart shows, the S&P 500 experiences pullbacks on a regular basis, even as it has risen in the long run. It’s important to maintain a broader perspective amid heightened economic concerns.
The possibility of a recession is back on many minds, but long-term investors should maintain a broader perspective. While tariffs have increased uncertainty and some economic data has been mixed, history shows that staying invested through challenging periods is the best way to achieve financial goals.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Are Recession Fears and Market Sell-Off Overblown?
Are recession fears and the market sell-off overblown? The answer is typically yes. This is because while recessions are a normal function of an economic cycle, they are infrequent, and market sell-offs rarely lead to prolonged downturns.
Could the current environment lead to a recession and bear market? It’s always possible. But these periods are usually short-lived and less severe than we initially fear.
While bear markets are unavoidable, bull markets are much longer with larger returns. Since 1956, the average bear market has lasted one year, two months with a decline of 36%. In contrast, the average bull market lasts 5 years 9 months and returns 192%.
Stock Market Bull and Bear Cycles Since 1956
The stock market has stumbled in recent weeks, with the S&P 500 and Nasdaq declining year-to-date. While tariffs have garnered the most attention, investors are also concerned about mixed economic signals including weak consumer confidence, hotter inflation, government worker layoffs, and more.
Some are now wondering if there will be a recession, and President Trump did not rule out the possibility in recent interviews. How can investors maintain perspective in this challenging market and economic environment?
To start, it is important to understand the difference between how individuals and households feel about the economy versus what drives financial markets. For example, when the prices of everyday goods and services increase, this can present challenges for our personal budgets. However, it may create potential opportunities in investments that can benefit from price increases. So, it’s important to remain objective and distinguish between our personal experiences with the economy and the factors that influence long-term investment returns.
Uncertainty around economic policy has increased
While the economy and stock market are not the same thing, they influence one another in important ways. When economic growth is strong, corporate earnings tend to grow which can boost share prices, and vice versa. Similarly, stock and bond markets can sometimes serve as a leading indicator for the broader economy since they reflect the forecasts of millions of investors.
This does not mean that the market is always correct. It’s important to remember that some investors and economists have been predicting a recession for nearly three years. Just a year ago, many believed a recession would be imminent due to inflation. Even academic indicators of recession, such as the “inverted yield curve” or the “Sahm Rule,” have not proven to be reliable this time around.
Instead, not only has the economy grown steadily in the past few years, markets have also performed well. Despite the current pullback, the S&P 500 has gained over 60% since the market bottom in late 2022, while the Nasdaq has risen 78%.
Of course, like a stopped clock that happens to be right twice a day, there will eventually be a recession. However, these examples show that predicting the timing of economic downturns is difficult. Investing based on the assumption of an economic downturn can lead to suboptimal financial decisions, which is why it’s important to build portfolios that focus on long-term goals rather than near-term uncertainties.
Why have recession concerns risen?
Historically, recessions occur when the business cycle enters its later stages, or an external shock takes place, such as a pandemic or financial crisis. The current business cycle has shown signs of slowing, but has not contracted just yet.
Instead, a possible trade war represents an outside shock to consumers, businesses, and global supply chains. Additionally, slower growth – or even two consecutive quarters of negative growth – are quite different from situations like the 2008 global financial crisis or 2020 pandemic shutdown.
The administration has said there may be a period of short-term “turbulence” in the economy. Even if tariffs do not directly harm growth, they have created an environment of uncertainty, as shown in the chart above. The administration has acted more swiftly with broad tariffs compared to President Trump’s first term, making the outcome harder to predict. Only time will tell if tariffs reach rates not seen since the 1930s, or if agreements with major trading partners will be reached.
It’s important to remember that tariffs are often used as a negotiating tactic for broader policy objectives. In the past, market reactions to tariff announcements were more dramatic than their actual economic impact. In 2018, the market fell as tariffs were implemented, but earnings growth was still strong and GDP was almost 3% that year.
While this uncertainty may be uncomfortable and has led to market swings, it’s in periods of economic strength that policy shifts can be most easily absorbed.
The economy has grown steadily despite investor fears
Beyond tariffs, the economic data is causing concern, including hotter-than-expected inflation and mixed jobs numbers. For example, the Consumer Price Index reversed course recently and rose above 3.0% for the first time since last summer.
Adding to this uncertainty, federal government jobs fell by 10,000 in February according to the Bureau of Labor Statistics, and more are expected. While federal workers account for less than 2% of the workforce, there is concern of ripple effects on the private sector and job growth overall. Despite this, the economy still added a healthy number of jobs in the latest report.
The price sensitivity of the consumer and their outlook on the job market have also worsened. Consumers now expect inflation of 3.5% over the next five years, the highest level since 1995, according to a University of Michigan survey. This has translated into feelings of deep pessimism about their financial situation in the next 5 years.
The irony is that markets have forgotten about the reasons for their post-election optimism: the possibility of pro-growth policies around manufacturing, energy, taxes, and regulation. As the chart above shows, consumer spending has driven the economy in recent years. Some economists hope that policy changes could boost business spending as well. An extension of the Tax Cuts and Jobs Act (TCJA) is currently being considered by Congress, and regulatory changes are in progress as well.
The S&P 500 experiences pullbacks on a regular basis
While the thought of a recession can be unpleasant, it’s important to remember that periods of slower economic growth are a natural part of the business cycle. Forecasts are not always correct, and even when they are, markets do not always behave in expected ways. While the past is no guarantee of the future, the market declines and subsequent sharp recoveries in 2020 and 2022 are recent examples of situations where markets can quickly change their tune.
Similarly, short-term market pullbacks are a natural part of investing. As the accompanying chart shows, the S&P 500 experiences pullbacks on a regular basis, even as it has risen in the long run. It’s important to maintain a broader perspective amid heightened economic concerns.
The possibility of a recession is back on many minds, but long-term investors should maintain a broader perspective. While tariffs have increased uncertainty and some economic data has been mixed, history shows that staying invested through challenging periods is the best way to achieve financial goals.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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