Unlike market peaks, when positive sentiment easily supports staying in the game, a market drawdown leads many to question portfolio exposure to equity. Fears of further downside to come not only leave many hesitant to retain an existing strategy; they can push some to throw in the towel altogether. In squishier times like these, when the pressures driving market declines are more difficult to pin down, it can be particularly challenging to find reasons to keep a steady hand, let alone be optimistic. We think the simplest, most powerful reasons are:



* Having proved unable to time the peak, one is unlikely to be able to time the bottom* History suggests that decisions to unwind stock exposures in the wake of market downturns tends to prove detrimental to financial outcomes* Missing out on potential upside ultimately may prove more painful



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We Saw It Coming...



According to the entity charged with delineating economic cycles, the National Bureau of Economic Research (NBER), “a recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough.” Over the past half-century, a market drawdown has preceded the declaration of every recession. But this makes sense. Markets generally get ahead of an eventual recession determination as investors digest whiffs of uneasiness that turn into anecdotes of slowing trends that in time become data that reflect a slowing of the broader economy across many metrics. Given that lag, we only learn of the fact of a recession well after one’s already begun. Sitting more than 20% below the market peak set back in January, then, as we ask ourselves whether the U.S. has or will enter into a recession, we should accept that the market seems to suggest that the answer is yes.







..Now What?



Like we said, a stock market downturn generally precedes the actual announcement of a recession, as investors react to changes in data trends that form the basis for the eventual declaration that a recession has occurred. As is now the case, when it seems the market already reflects a sense that a recession is in the offing, we have found it a particularly opportune time to revisit a basic premise of investing: that all investing carries risk, but that investors tend to be rewarded for patience during times of market stress. Historical patience even against a potential current or oncoming recession supports that tenet. Across 16 recessions over the past near century of data that we show in Figure 2, once a recession has begun, the market’s been rather quick to provide durable gains. Acknowledging that in most cases the market is off a prior peak once the recession has started (look back to Figure 1), investor patience may allow those gains to offset those earlier losses, then potentially rally into positive territory over time.







This tends to have been true whether or not the drawdown was associated with a recession. Looking at the largest 10 drawdowns in the S&P 500 Index since 1925, which we do in Figure 3, all saw gains over the ten years subsequent to the depth of the downturn. In fact,