“I’m very worried about a recession so I’m not investing in equity funds now,” said a potential client recently

Well, if you exited the market in October 2007

and, most importantly, re-entered on 9th March 2009

and then exited in early Feb 2020 (before any word of Covid) climbing back in on the 23rd of March 2020

then I’m impressed and you have my full attention

Of course, you’ll need to nail it 100% again

Because it’s no good selling at the top, (which you’ve already missed)

and then not buying back at the very bottom, because you absolutely HAVE TO get both legs right

And even if you nailed the Sell, you’ll probably suffer the same fate as most bears

Which is?

They always think there’s more downside ahead so never buy back in at the right time

But the good news is that even after this horrible year (for most), the World Index is up 10% since before Covid and 58% on the Great Financial Crisis

So why bother?

Because not even Nobel Economists can accurately call recessions,

In 2008 the American Enterprise Institute analysed comments by Nobel Laureate Economist, Paul Krugman and concluded he “called 9 of the last none recessions under Bush Administration”

What do you mean he called, “none”?

He foresaw recessions that never materialised as recessions – ghostly recessions, not ghastly recessions

Imagine selling because you’re worried the market will fall

but then it doesn’t and keeps rising,

now, what do you do?

But he’s not alone – Nouriel Roubini, the famous Economist who is credited with calling the housing crisis and crash in 2008, predicted Covid would lead to

Not a “V shaped” recession – where you fall sharply and recover sharply

Or a “U shaped” recession – where you fall, bounce along the bottom and then recover

No; he called an “I shaped” recession – where you fall and there’s no recovery

Are you falling?

But on what date did he make this prediction?

at the 2020 market bottom…

You see recessions are part of the cycle

In the last 50 years (200 quarters) in the US, there have been 27 quarters of negative GDP growth

But the US stock market was only down in 52% of these quarters

In 2014, Historian economists, Dimson, Marsh and Staunton (DMS) studied the relationship between long-term stock market returns and long-term GDP growth cross-section of 21 countries from 1900 to 2013 and found, “evidence linking equity returns to GDP growth was weak”

Simple rule – if it’s ON the front page, it’s already IN the price

So if we can’t forecast recessions

and there’s no link between GDP and equity growth

Why bother?

Just find a manager who has a margin of safety built into their process so you can stop worrying about any recessions – ghosts, or otherwise

But how do I know if my manager worries about the “margin of safety”?

Well, everyone this year seems to be worried about a recession

so a quick look at their performance will tell you…