tech stocks

The Best Way to Get to Know a Recession

photo shows a foggy bend in a road

Tolstoy’s great novel Anna Karenina begins, “All happy families are alike; each unhappy family is unhappy in its own way.”

This seems like stretching a point. In my life, I’ve had the good fortune to know many happy families, all quite different. But the quote does capture the uniquely lonely feeling that can come with misery.

The market, we believe, operates in much the same way. Bull markets can cover up a lot of performance differences, and although no two bull markets are quite alike, most investors are generally going to be happy regardless.

But each and every recession hurts in a unique way. We just have to wait.

The market behaved very differently in the tech wreck of 2000–2002 than it did in the Great Recession seven years later. And what we see now is different than either of those!

In a conventional recession, heavily cyclical companies like manufacturers get hammered hard. But cyclical companies generally understand the boom-and-bust cycle and plan for it with their savings.

Consumer goods companies on the other hand might take it for granted that people will keep buying food and clothing and other necessities, so they generally do not keep as much cash on hand. The short, sharp shock we experienced earlier in the year took out a lot of retailers that might have weathered a longer, shallower recession.

Homebuilders are normally one of the biggest casualties in a recession, but they are doing booming business now. So are the companies that make the materials they work with. Many big tech stocks, normally volatile and erratic performers, have been scorching the markets.

This is a stark contrast to the 2007 recession, when the housing market cratered and took out a lot of homebuilders, or the 2000 recession, when growth tech stocks got demolished.

In all likelihood, those previous recessions helped set the stage for these sectors’ current outperformance. Going into this downturn “everyone knew” that homebuilders were going to get wrecked because it happened last time.

Perhaps in five or 10 years there will be big opportunities for investing in restaurants or cruise lines as the next recession prompts investors to flee the businesses that got hit hardest in this one. No guarantees.

Every downturn is different, and we have no way of knowing what the future will hold. All we can do is stick to our principles: avoid the stampede and seek out bargains. Sectors that get trashed in one recession may be found in the bargain bin before a different recession. This is why we study and keep our eyes open.

Clients, if you have any questions, please call or email us.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

NEITHER HERE NOR THERE

photo shows gold key in a lock hole

The secrets to success aren’t locked in the past, but they also aren’t waiting to be revealed in some crystal ball. History and context have plenty to teach us, and we ought to prepare as best we can for the future.

But success depends on our ability to move among the past, present, and future. That’s the key.

Imagine if we relied solely on the past. Human tendency leads us to believe current trends will continue. We are masters at spotting patterns and weaving details into coherent tapestries. (Those are the moves that kept us alive when our main job was to avoid predators and find sustenance.)

Today our brains try to do the same thing—to a fault, sometimes. Economic information surrounds us, and we want to find the story in it quickly. The brain wants to spot the pattern and react. When we learn that a company is finding some early success, for example, we want to conclude, “It’s a rocket ship, look at it go!”

Understanding the current trajectory is important, but the patterns of history are especially useful. Every age has fallen prey to some sort of mania. Tulips in 16th century Holland? Tech stocks in the 1990s? Not such different moments. There’s an edge in both knowing the history and being able to apply its lessons.

But what if that’s all we have, the wisdom of history? Well, we miss the big turning points, those moments of departure. We have to understand why and when a change might occur. The future will not be like the past: a proactive approach may keep us ahead of the pack.

In business, even when our past methods and processes have served you and us well, the world keeps spinning: we can expect change, which means we’d do well to keep an eye on potential opportunities, bargains, and possibilities.

My education includes a degree in history. When I was in college and developed a growing interest in business, I spent time on my own in the campus library with The Wall Street Journal and The Journal of Commerce. Like I’ve mentioned before, it’s tough to say which has been more valuable to clients—the history studies or the business reading.

How we got here and where we’re going are two different conversations. So the secrets to success are neither here nor there—literally. They’re in the wisdom in between, and we have to keep perspective.

Clients, if you would like to discuss this or any other topic, please email us or call.