tl;dr: A recession makes good stocks and blue chips on sales.
We just experienced one of the worst 5-day spans in recent memory with the S&P 500 falling by nearly double digits since last Thursday alone.
This sell-off pushed the S&P 500 down -24% from its highs on an intra-day basis. Last week when inflation data was posted, the CPI rose by 8.6% (the highest since 1981).
The Federal Reserve raised rates by 75 basis points on Wednesday, once again, marking another historical abnormality, in an attempt to cool off inflation. There are geopolitical headwinds abound. COVID-19 is still causing lockdowns in China which is wreaking havoc on the supply chain.
Real estate investment isn’t all rosy and unicorn either. At a current rate of 6.6%, the mortgage has doubled since the start of this year.
Any layouts, don’t get me started on layouts. The tech sector, which used to be where the highest paychecks come from, is laying out their employees like flies.
The list goes on. What do all these mean? A recession.
At this point, it’s not clear how long or severe it will be (that is dependent largely on monetary policy), what I do know is that the Federal Reserve has a near impossible task ahead of it with regard to attempting to slow down the economy by raising rates and reducing the size of its balance sheet without causing a major economic issue.
So far, most reports from credible analysts/firms that I’ve read are calling for a relatively tame, short, and shallow recession (due largely to the relative strength of the labor market). I tend to agree, but that doesn’t change the fact that to most investors, the word “recession” is a scary one.
It doesn’t take a very long memory to recall the financial destruction that the COVID-19 crash of 2020 or the Great Recession of 2008/09 caused. The dot-com boom/bust cycle lasted 3 years from 1999-2002 and investors who were involved with the market back then know how long it took for many positions to be made whole again…
However, the fact of the matter is, I do look forward to weakness in the stock market because I love buying blue chip equities when they’re trading at sales price.
Generally speaking, the old saying that “there is always something on sale in the market” is correct.
Regardless of whether or not the major averages are sitting at all-time highs, or down -24% like they are today, I can usually find an intriguing value to buy.
However, during bear market periods, opportunities arise that are rarely seen, and this is exactly what gets me so excited about the prospects of a significant stock market sell-off.
Ultimately, I want to be accumulating shares of the very highest quality companies at fair (or better) prices.
Over the long-term, I believe that quality wins out (and produces outperformance); however, I also firmly believe that investors should not chase irrational momentum and buy stocks, no matter how wonderful they are, if they are overpriced.
When it comes to the bluest of the blue chips, oftentimes, these shares can trade at high premiums for years and years on end. This makes it very difficult to accumulate them (for a value-oriented investor like myself).
But, that all changes when fears of recessions arise.
Right now, I’m beginning to see discounts from around the highest quality REITs that I track at iREIT that are unique to recessionary/bear market environments. And, those discounts are what I’m trying to talk about in this post.
These are the types of stocks I’m most excited about accumulating moving forward and hopefully, by discussing the rarity of these sell-offs, you’ll see that recessions aren’t necessarily something to fear, but instead, something to get excited for (as a long-term investor).