Updated: Feb 2
How to Stay Positive if Facing Stock Performance in a Recession.
Value Stocks Outperform Growth by the Largest Margin since 2000.
Keeping Perspective & Plan for the Positive in a Market Downturn Year-- Not Time to Panic.
Here are the numbers for comparing Q4 to the 1, 5, and 10 year returns for US Stocks, International Developed Stocks and Emerging Markets.
1. How to Stay Positive in Recessions?
Many financial professionals and investors may feel anxious as stock performance in 2022 endured the worst year since 2008 and bond prices also fell as inflation reached a four-decade high. Whether or not we are in a recession has become a hot topic. To examine how stocks have behaved during US economic downturns over a century of economic cycles, Dimensional Fund Advisors has created a powerful tool to educate investors in their interactive chart showing “Market Returns through a Century of Recessions,” also found here in this report.
The duration, inflation, industrial production and return from the peak, and gains that follow vary significantly over the past century of economic downturns. “There is no cookie-cutter recession and no absolute signal of when to get in or when to get out of the market,” says Wes Crill, Head of Investment Strategists at Dimensional Fund Advisors. “Most years still end up positive, and even though some do end up negative, we believe you are better off staying invested rather than panicking because of a drop.” We see this in the Q4 Market Review significant positive returns for both the US Stock, International and Emerging Markets in the fourth quarter of the year.
2. When Value Outperforms Growth
When some investors have wondered about the value of Value Stocks (stocks with lower relative prices), we have consistently relied on research that indicates value investing can continue to be a reliable portion of a balanced portfolio for investors to increase expected returns. Dimensional article “When It’s Value vs. Growth, History is on Value’s Side” reports that Value outperformed growth by the largest margin in 2022 since 2000.
Investors who remained disciplined through the past few years to include a diversified and balanced portfolio with Value Stocks were rewarded this year. The Market Review for Q4 shows Value Stocks posting 12.42% and Small Value posting at 8.42% gains for the quarter. In the 2022 Annual Market Review, we can see that Value also outperformed growth.
Value investing is based on a fundamental tenet of investing: the premise that paying less for a set of future cash flows is associated with a higher expected return. According to research by Dimensional Fund Advisors (See When It’s Value vs. Growth, History Is on Value’s Side) on average, value stocks have outperformed growth stocks by 4.1% annually in the US since 1927.
Combined with lengthy historical data on the value premium, the research from Dimensional shows that value investing continues to be a reliable way for investors to increase expected returns.
“Just like data shows that bull markets often last longer than bear markets, and have higher peaks, value runs are much longer and reach higher peaks than the downturns," says Dimensional Head of Investment Strategists, Wes Crill says. "But it is important for investors to balance their enthusiasm for higher expected returns with their tolerance for underperformance.”
3. Perspective & Plan for the Positive
In a Market Downturn Year—Perhaps Not Time to Jump or Panic.
Are you the type of investor who looks at the market every day, stressing out and asking, “How am I doing?” The fourth quarter of 2022 posted positive returns, but much of the headlines and market volatility was tough on investors experiencing more down than up this past year:
The coronavirus pandemic eased but was still a global concern, along with supply-chain issues.
Inflation reached above a 40-year high in the US as the Federal Reserve increased interest rates to combat rising prices.
Russia invaded Ukraine in February, creating political stability and energy price concerns.
A midterm US election shifted power and expectations on both sides of the aisle.
Despite several rallies and a positive Q4, the equity and bond markets ultimately fell for the year.
David Booth fears that investors actively trading are “stressed out, worrying about how the news alert they just received will impact their long-term financial health, and whether they can or should do anything about it.” (See “Time the Market at Your Peril,” in the Q4 Market Review) The trends of faster and easier ways of investing can also allow people to lose more money faster and easier. The financial industry is providing more investing options with ETFs that are easier to trade, free platforms on phones, including the supposed “hot trends” like crypto-currency we’ve all seen crash recently.
At Financial Freedom for Dentists, we’re not in the game of jumping on the hottest trend or worrying and guessing when it comes to investing. In Market Review 2022: After a Down Year, Looking to the Past as a Guide” many of the hot trends at the beginning of this year show a more complete story and give investors more of a reason for caution. Most interesting to note now is the performance of Cryptocurrencies and the group tech stocks known as FAANG stocks. At the beginning of 2022, and the past few years, these have been some of the most talked about investments. However, just a few years after being in the top 10 for strong stock returns, companies like Facebook parent Meta Platforms, Amazon, Apple, Netflix, and Google parent Alphabet all performed below the US market, with Facebook and Netflix suffering particularly difficult declines in value. This is a good reminder of why investors must never assume past returns will continue for future investments, regardless of how strong a company’s track record may be.
Having an investment plan tied to time-tested academic research, and educating our clients based on evidence-based principles and a balanced portfolio is more relevant than ever. As access to investing expands, it becomes even more important to adopt an investment plan that doesn’t try to actively pick stocks or time the market. As we enter 2023, our purpose is to help you, our clients, with financial and investment planning so you can relax and focus on your dental practice and the life you are building. We will continue to recommend the best approach for long-term financial well-being, based on history and academic research: to make a plan, implement it, and stick with it.