How will recession affect the stock market?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 404.4 million views in recent years.

In the answers below I focused on the following topics and issues:

  • How long will we take to recover from the 2020 market crash? What can the recovery tell us about the 2022 situation?
  • How will recession affect the stock market? Are there any safe havens?
  • Why do intelligent people struggle to succeed?

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Source for all answers – Adam Fayed’s Quora page.

How will recession affect the stock market? Are there any safe havens?

This question was asked during the peak of the covid-19 panic. Since then, most markets have increased. This went against the dire predictions at the time.

There is something that should be taught at school in a fun way. Namely, school children should be made to predict whether a recession will come or not, and what will happen to the stock market in the short term.

After they have made their predictions, their results should be compared to the experts who have made the same predictions.

This will teach an invaluable lesson. Just because a group of people has superior knowledge, doesn’t mean that they will be able to predict the short-term.

Such experiments have been done before. One experiment was done with a bull who “picked” the best stocks for the short term.

This was measured by where his feces would land after doing its business!

Guess what? The bull beat many experts. Similar experiments have been done which show that cats, 5-year-old humans, and monkeys all do just as well (or better) than professional economists and many others.

That doesn’t mean you should “give up” on analyzing per see.

It merely means that it is wise to understand the following facts:

  • Nobody can consistently predict the short-term likelihood of recessions, the markets, and much else. This is especially true of the media classes.
  • Past short-term predictions are no indicators of future correct predictions. Almost everybody who predicted the 2008-2009 financial crisis, such as Roubini, got the next predictions wrong.
  • The stock markets, such as the S&P500, have gone up in the long term, especially if you reinvest dividends. However, over significant periods, other assets like housing and bonds can beat the markets.
  • Stocks have gone up during recessions, and down during recessions. Up during wars and pandemics, and down during pandemics. There are few strong correlations including between GDP growth and stock market performance.
  • Even many professional traders lose out due to overanalyzing.

Therefore, as a result of the above, it makes sense not to worry, or try to predict the future. Instead, it makes sense to be long-term, be properly diversified, reinvests dividends, and so on.

The biggest safe heaven is actually time diversification – investing for the long-term – to an even greater extent than asset diversification.

How long will we take to recover from the 2020 market crash?

It took a few months. Few people thought that at the time.

Now many people are asking the same question in 2022, even though the market sell-off is less extreme.

The simple answer is that nobody knows for sure. The recovery could be as quick as 2020 or might be slower.

What we know is that the average bear market is short:

Yet some bear markets can go on for a long time. It took 2–3 years for markets to recover from the financial crisis of 2008:

It took the Nasdaq about 14 years to recover from 2000:

What we do know is:

  1. Markets will recover for 99.9% sure, as they always have done in history. We just don’t know when they will
  2. When markets are down, younger investors should be delighted, as it is an opportunity to buy low.
  3. If you reinvest your dividends, the market will recover more quickly. The below chart is an example of the FTSE100. Even the Japanese Nikkei has done OK adjusted for dividend reinvestment.

Just as when you buy a rental property, you should factor in the dividend yield and not just capital growth, the same is true in stocks. Reinvesting that 2%-3% a year can make a true difference over decades.

The last point also brings me to another thing. Not all markets are down for 2022. The FTSE is up 0.18% + has delivered a small dividend yield, so a buy and hold investor has made about 2% from that this year.

It wasn’t a very popular market in the last decade, and this point shows the importance of diversification as well.

What we don’t know is if individual positions will recover. Whilst the general market has always recovered historically, individual shares can always go to zero.

Look at the 1999-2000 Nasdaq situation. Somebody who bought in 1999 and held until 2021, made a great return, despite the 14-year wait to break even.

Yet many individual stocks went to zero.

Why do intelligent people struggle to succeed?

I have seen this on many occasions. The main reasons I have observed are:

1. Lack of focus.

Smart people usually have many options. Sometimes that is a bad thing. People with fewer options can be more focused.

As both Bill Gates and Warren Buffett have said, focus is arguably the most important aspect of success.

If you can’t define what success is for you and aren’t putting in hard and smart work in a focused way to achieve that desired result, it is more difficult to achieve things.

2. School versus real life

People who perform well at school get used to certain things. These things include getting rewarded for hard work unless bad luck occurs in an exam.

In real life, we aren’t usually linearly rewarded for luck, unlike “continual assessment” at school or college.

Therefore, not giving up just before you succeed is important, as is taking advantage of any luck you are afforded.

Yes, the more you practice the more lucky you tend to become as per the quote below, but that might not materialize for years or even a decade or more.

There has been an incredible business success where founders haven’t even achieved their potential until their 60s! Often we need to embrace the uncertainty in business.

Life isn’t fine. Accepting that can be useful.

3. Lack of humility

Understanding your limitations isn’t always a bad thing, as you can outsource over time.

Richard Branson failed at school, is dyslexic, and was not good at reading balance sheets according to his own words, but he understood this and hired great people.

That might be an extreme example, but I have met many people who have been incredibly successful who simply outsource to others, or find a way to overcome the limitation.

Very smart people are often likely to assume they know things about topics that are outside their area of competence, or over-analyze.

I see it all the time in investing. Academically smart people are more likely to read a misleading article online and allow that to affect their judgment or assume they know more than they do.

More humble people are more likely to keep things simple, which is beneficial.

4. Expectations

If you have “peaked too early”, it can be easy to assume that you will succeed, and then be let down if you don’t.

It might also start to affect your work ethic. We see this even in areas such as sports. The “next best thing” often goes off the rails, parties, and so on.

5. Being smart isn’t always a substitute for wisdom

A wise person doesn’t want to be the smartest person. A wise person is more likely to want to be the owner of a business where they are the least intelligent person in the room.

This is so they can leverage that talent, in the same way as wanting the smartest accountants, lawyers, advisors, etc.

6. Lack of risk-taking.

Some academically minded people do take loads of risks. However, because they have more choices, the incentives are different for people who have underachieved academically.

Why start your own business if you can earn 200k as a lawyer? Why invest if you can save a reasonable amount every year?

People regret these decisions once they hit their 40s and 50s. I have run out of the number of people who regret not investing at a younger age, or taking more risks when they were in their 20s.

Of course, though, we can’t forget that being very smart is a huge benefit. There is a correlation between intelligence and achieving various forms of success.

Those who combine high intelligence with other positive attributes can achieve incredible success.

This is especially the case for those who combine high emotional intelligence, with cognitive intelligence, as there are huge benefits to having softer skills.

Softer skills can help you manage teams, market your ideas, sell, negotiate a pay rise, get into good and stable business and personal relationships, and much else.

People with high emotional and cognitive intelligence, fail far less often than those with mere academic intelligence, especially if it is combined with a work ethic.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 417.7 million answers views on Quora.com and a widely sold book on Amazon

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