The economy has officially recovered from the pandemic and the sharpest recession in history, based on measurements that include Gross Domestic Product (GDP) data. We’re back to pre-pandemic levels in less than a year and a half — and that’s remarkable. However, the rapid change in the markets has left some investors unprepared and scratching their heads. More than ever, it’s important that long-term investors focus on the entire business cycle as they manage their portfolios.
In normal times, investors tend to base their expectations on smooth patterns. And that’s natural because forecasts are often based on recent patterns or historical examples. So the unprecedented nature of the pandemic and recovery have been challenging. This is especially true for those who expected a repeat of the 2008 financial crisis which involved a long decline followed by a slow multi-year recovery.
Chart: The economy has returned to pre-pandemic levels
Sources: Clearnomics, Bureau of Economic Analysis, National Bureau of Economic Research, July 29, 2021. Data shown is through Q2 2021.
Instead, the recent GDP report showed that the economy grew at an annualized pace of 6.5% in the second quarter, pushing the economy above its pre-2020 level. This is the fourth fastest quarterly growth rate since 2000 and is more than three times faster than the 2.1% average over the past two decades. This surge in growth should not be surprising as the economy reopens from the economic lockdown. Factories and equipment are still in working order, employees have maintained their training and skills, and those businesses with strong balance sheets have been able to reopen quickly.
Because of this, the National Bureau of Economic Research, the official arbiter of business cycle dates, has determined that the COVID-19 recession lasted only two months (from February to April 2020) the shortest on record. This means that the current expansion is now nearly a year and a half old which, in hindsight, validates the market’s immediate recovery.
What should investors expect in the coming months?
The question facing investors today is what to expect as the economy transitions from initial recovery to sustained expansion. As this shift occurs and the cycle resembles a more traditional one, it’s possible that historical patterns may become more relevant. This would suggest that, while the business cycle is still young, the pace of growth will certainly slow. After all, the economic reopening and COVID-19 stimulus are one-time events which should fade as we approach 2022. However, this doesn’t mean that growth cannot remain strong, especially if business and consumer spending keep pace.
Of course, the economy and markets are not the same thing. Instead, they are related since robust economic growth, even if not at the pace of 6.5%, can drive corporate sales and profitability. Over longer timeframes, this can support market returns and bring valuations down to more reasonable or realistic levels. This can happen across sectors and asset classes which can benefit diversified portfolios.
Consider a balanced portfolio built for the long term
It’s generally better to stay focused on long-term goals rather than daily market movements. Investors ought to stay balanced as the economy enters a new phase and hold portfolios built around all phases of the business cycle. While the rapid pace of the past 18 months may decelerate, even slow and steady growth can be enough to support long-term financial goals.
It’s also risky to move your money in and out of the market to try and capture the performance highs and avoid the lows. Instead, consider setting up an automatic investing plan. Over time, you’ll buy the average price of an investment, which is exactly what you’d want to achieve in the long run.
Disclosures
This material, as well as the insights and data within, have been provided to MoneyLion by Clearnomics, Inc.
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