This article first appeared in Realogics Sotheby’s International Realty’s 2023 Forecast Report. To get your digital or print copy of this comprehensive look at the Pacific Northwest’s ever-changing residential real estate landscape click here.
After coming off a tough year for the stock market, many investors are pondering what lies ahead for the markets.
After 40 years of declining rates, inflation is at its highest level since the early 1980s. Investors may be hoping for a return to normal after the Federal Reserve stops raising interest rates and inflation subsides. As rate cycles reverse, the process often takes longer than anticipated which means inflation may persist. This means a straight path forward is unlikely due to several shifts that may define the next decade of investing.
Another big question many are asking is, are we headed for a recession? As of the time of writing this article, it has not yet been confirmed, although, many economists believe we are. Recessions are painful, no doubt about it. But they are necessary to wash out the excesses of prior growth periods like the one investors enjoyed over the past decade. You can’t have such a prolonged period of growth without an occasional downturn to balance things out. It’s normal, expected, and considered a healthy part of how our markets work.
When looking at the global economy, many economists agree that it appears Europe is likely already in a recession, made worse by the war in Ukraine. China’s growth has decelerated essentially to zero, pressured by rolling COVID-19 lockdowns. And the U.S. economy, while stronger than most, appears headed for a downturn as elevated inflation and higher interest rates take their toll. If the U.S. does slip into a recession, if it’s not already in one, how bad might it get? Economists expect it may be worse than the post-tech and telecom bubble burst recession of the early 2000s, but not nearly as bad as the 2008–09 financial crisis. It’s important to not lose sight of the fact that recessions set the stage for the next period of growth. The stock market seems to be reflecting a more realistic view that a recession is looming, but historically speaking, stocks also tend to anticipate a brighter future ahead, long before it becomes clear in the economic data.
If we end up in a recession, how long it will last?
While each recession is painful in its own way, one potential bright spot is that they don’t historically last very long. An analysis of 11 U.S. cycles since 1950 shows that recessions have ranged from two to 18 months, with the average lasting about 10 months. What’s more, stock markets usually start to recover before a recession ends. If history is a guide, they could rebound about six months before the economy does.
As an investor, the benefits of capturing a full market recovery can be powerful. The strongest gains have often occurred immediately after a bottom. One thing all past recessions and bear markets have in common is that they eventually end.
During a recession or economic downturn, where to invest your money can be both challenging and stressful. Certain investments, such as stocks, can be riskier in a down market. However, you might be able to achieve stable returns in a recession if you manage your risks by rebalancing your portfolio or using strategies such as dollar-cost averaging. Investors need to act cautiously but remain vigilant in monitoring the market landscape for opportunities to pick up high-quality assets at discounted prices. These are difficult environments, but they also coincide with the best opportunities. Conversely, investors who want to survive and thrive during a recession will invest in high-quality companies that have strong balance sheets, low debt, good cash flow, and are in industries that historically do well during tough economic times. Once the economy is moving from recession to recovery, investors should adjust their strategies.
It’s also important to keep a long-term view. If you won’t need to withdraw from your account for at least five to 10 years, you shouldn’t worry too much about short-term market changes.
Long-term investors willing to stand through these volatile times will likely be able to eventually reap the rewards.
However, if you need to access the funds sooner, you may want to allocate enough money into an interest-bearing money market fund. It’s not ideal to be withdrawing money from your equity portfolio when the stock market is down. Setting money aside for the first year or two of retirement, college, or an emergency fund can provide you with cash when you need it, which helps you avoid dealing with market fluctuations.
There are also investments to consider to hedge against inflation. Real estate investments, including raw land, residential properties, commercial properties, and real estate investment trusts (REITs) are assets in which value historically increases faster than the rate of inflation. Unlike stocks and bonds, real estate is an asset that generates recurring income streams and an increase in asset value over a long-term holding period. For these reasons, real estate is often referred to as a “hard asset.”
While the net returns of bonds, stocks, and fixed-rate vehicles stand to take a hit as inflation rises, real estate investors can mitigate the effect of inflation by raising rents on their properties. Overall, you can expect that the private real estate in your portfolio, as an alternative investment and real asset, will fare better amid inflationary challenges when compared to traditional stock and bond investments. Therefore, it may be an opportune time to consider re-balancing your portfolio to include private real estate.
No one can predict what the stock market will do and how people will react in the short term, so it’s wise to commit to your investment strategy during a market downturn and participate in the recovery.
*The information provided is for general information purposes only and all expressions of opinion are subject to change without notice in reaction to shifting markets.
THE IMPORTANCE OF A YEARLY FINANCIAL CHECKUP
You understand the importance of maintaining your physical health. Just like your physical health, your financial health is equally vital. If your finances had to pass a physical test, would they pass with flying colors? When it comes to protecting your family and securing your legacy, it takes healthy finances. Are yours up to the test? If you don’t know, it’s time for a checkup. Whether your last medical appointment was for preventative care or to diagnose an issue, a series of questions and tests were run to make an accurate assessment of your physical health. This snapshot helped devise a plan for your optimal physical health moving forward.
When was your last financial checkup? Much like your physical health, it’s essential that you are aware of your financial well-being to determine what adjustments are necessary to stay on track. Just like with our bodies, to ensure we are living our best life and propelling toward our goals, it’s vital that we have a clear knowledge and understanding of our level of financial wellness.
To schedule a complimentary financial checkup, visit prevailwealth.com/rsir →