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A Hypothetical Scenario

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A Hypothetical Scenario

Hello again Gents, I do love these Q&As - always very informative. So, let's assume that a US recession is inevitable and let's assume that you're too old and tired to sit it out and wait for the recovery. What sectors do you exit from and what, if any, are worth holding? Let's also assume that you're heavily invested in commodities like gold, silver, platinum and uranium and you're staring down the barrel of the recession, but also a failing $US - a contra-indication? Please hypotheticalise (my new word) away. Thanks as always.

Answer

Hi David,

Predicating a US recession and its subsequent time to recovery is a tough ask, just look at the statistics:

  • Since World War II, there have been 12 U.S. recessions, with gaps between them ranging from 1 year to over 10 years.
  • The longest US recession over this time was 18 months between 2007 and 2009 when the GFC wiped ~58% off the S&P 500.
  • The market then took ~4 years to regain all of the losses and post a fresh all-time high.

At MM we are long term stock market bulls and the numbers over the decades support this with recessions providing valuable buying opportunities for investors prepared to invest when the crowd are looking for the exits. However, adopting a defensive stance into a recession can add significant value to a portfolio making it easier from a psychological perspective to accumulate into weakness when the market will look and feel “wrong” while the bears will be banging their drums in the press.

  • A defensive portfolio will be overweight stocks from the utilities, consumer staples, and telcos plus cash/fixed income products.

Note the markets only factoring in a 30% chance of a US recession at the moment.

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US Recession Probability Forecast
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