Weak economic conditions may not call for investor pullback

What does that mean for investors? Are signs of a downturn in the economy an indication that it is time for investors to pull back from stocks and stock mutual funds and look for lower-risk alternatives in their portfolios? History says the answer may be no.

It is never easy to predict where the stock market will stand six months or one year from now, and the state of the economy does not make it any easier.

Historically, there have been nine recessions going back to 1950. A recession is officially defined by the National Bureau of Economic Research as “a significant decline in economic activity spread across the economy lasting more than a few months.”

The primary measure of economic growth is the nation’s Gross Domestic Product. Traditionally, a recession is defined as two consecutive quarters of a declining GDP.

During the past nine recessions, the stock market, as measured by the Standard & Poor’s 500 – an unmanaged index of stocks – actually gained, on average, 1.24 percent during the length of the recessions. Through five of those nine recessions, the market posted positive returns.

So why would the stock market potentially gain value at a time when the U.S. economy is struggling? One reason is that the stock market tends to anticipate events several months in advance. Even if the economy is in the doldrums, investors are often looking ahead to factors that would indicate that better times are on the horizon, and they invest accordingly.

In eight of the nine recessions since 1950, stocks generated significant gains in the year following the official end of each recession, as defined by NBER. It is important to know that economists need a few months to determine exactly when an economic downturn begins and when it may end.

In the year after the past nine recessions, the S&P 500 gained an average of 13.47 percent. Only after the last recession, in 2001 (coming off the unprecedented bull market of 1991 to 2000 and the Sept. 11 terrorist attacks) did stocks decline in the subsequent year after the end of the recession. In most cases, the environment continued to benefit stock investors post-recession. The S&P 500 Index rose, on average, 34.66 percent over the course of five years following the close of the last nine recessions.

There is no telling whether the United States is headed for a recession now, or if current economic struggles will be overcome and the country will enjoy a more prosperous economy.

It can be easy to get caught up in the current stream of negative news about the markets and economy and become defensive with your portfolio. Despite potential short-term impacts on the markets, it is important to stay focused on long-term goals. Three concepts to keep in mind are:

• Stick to a long-term investment strategy. If the plan that’s already been developed makes sense for the long run, don’t let current distractions change the established course.

• Stay diversified. Owning a variety of investments that perform differently through various market cycles can help cushion the blow of a downturn in any single investment.

• Keep on investing. If investors can continue putting money to work, even at times when the markets are fluctuating in value, they are likely to get closer to achieving their goals.

Just because the economy may be going through temporary turmoil does not mean investors have to take cover. A good long-term strategy may be the best defense to short-term challenges.

Paula Dougherty, CFP, ChFC, CLU is a Certified Financial Planner with Ameriprise Financial in Springfield. She may be reached at paula.j.dougherty@ampf.com.[[In-content Ad]]