A large number of investors, talking media heads, and Wall Street analysts are predicting that the US toward another recession. Even the mention of the 'R' word (recession) sends fear through not only investors blood, but nearly all American's.
Why? Because soon after hearing the word most people begin remembering 2007-08 financial crises which sent the US economy into a 19-month recession, which to make matters worse from a psychological standpoint has been coined 'The Great Recession'. Furthermore, since the 2007-09 recession is still fresh on everyone minds and was terrible in terms of job lose, declining economic activity, low 401-K balances and stock prices, when the 'R' word is used now, everyone immediately thinks of all those terrible things happening again. This causes fear and panic to quickly set in.
From a market standpoint, this can send equity and commodity prices lower, further increasing the likelihood of a recession. (Think self-fulfilling prophecy.)
But let's stop right there for a moment and look at what is really happening with the markets. Currently, the Dow Jones Industrial Average Index (DJI) is down 10.75% year-to-date while the S&P 500 Index (SP500) is down 11.15%. Alright, so the markets down slightly more than 10% since the start of the year! This should not be considered a recession, but a market correction.
From a historical perspective, the markets experience a correction, a fall of 10% or more, once every 357 days. So that is once a year, on average the markets have fallen more than 10%. Prior to the current correction, we are experiencing, the last 10% decline happened roughly 1,100 days or three years ago. To say we were due for a correction is an understatement. Furthermore, one study showed that between 1945 and 2013, the average correction amounted to the market falling 13.3%.
Now to the good news about market corrections. First, the same study mention above showed that the average correction lasted just 71.6 trading days. So while a typical correction happens once a year, they only last for about 14 weeks or just slightly more than one-quarter of the year. Again looking at history, the odds of the market being lower than where it stands today in five years from now is only one out of five, or a 20% chance. For longer term investors, there has never been a 20 year period, regardless of when you got in the market when stocks lost money during that time. This is even when taking into consideration inflation.
With that information at hand, regardless of whether we are heading toward a recession or not, you should still keep investing. So let's talk about where you should be putting your money today.
I am always a fan of keeping it simple and stashing money away in an S&P 500 Index ETF such as the SPDR S&P 500 ETF (SPY). With the SPY, you get the top 500 US companies (so no surprises about what you own), low fee's, a 2% dividend yield; so basic exposure to the equity markets. If you are someone who just wants to put money to work in the markets, doesn’t want or have the time necessary to pick individual stocks, the SPY is the way to go. Regularly plug money into it and forget about it until you're ready to retire.
If you are a little more hands on, but still don’t want to jump into individual stock picking, no problem, there are thousands of exchange traded funds you can get into which will allow you to focus your assets on particular industries. Two industries I find interesting right now are the energy or oil and gas sector and technology stocks. I like being a contrarian investor, so with depressed oil and gas prices and most investors running away from the industry, I see opportunity. The same can be said with technology stocks, as we have seen the big leaders in that sector getting bashed by the markets. Apple, Amazon.com, Netflix, Tesla, Twitter, GoPro, Solar City; just look up and down the NASDAQ and you will find tons of tech stocks that have been crushed over the past few weeks.
But, before you jump into these two industries, we need to remember, there is a reason some of the stocks in those industries are down, besides just that the low-tide is bringing all boats down. For the oil and gas stocks, the smaller companies with more debt and higher production costs are in bad shape. But, the larger, older companies in the industry will be able to ride out the low commodity prices and will likely be stronger when prices again go higher, someday. With tech, it’s the same thing. Twitter is losing users, GoPro shows signs of market saturation, but Netflix is still strong, Amazon is still growing rapidly.
So two ETF's I like in the energy sector are the Guggenheim S&P Equal Weight Energy ETF (RYE) and the iShares U.S. Energy ETF (IYE). The Guggenheim tracks an equal-weight index of the US energy companies that reside in the S&P 500. That would indicate it is only buying the larger energy producers, whom shouldn't be as affected by lower commodity prices as others in the industry. It currently holds just 40 companies. As for the IYE, this ETF tracks a market-cap-weighted index of US energy companies as classified by the Dow Jones. So, similar to the RYE, but this ETF holds 82 companies, which increases your risk, but also can increase your upside potential.
As for technology ETF's, I currently again like the Guggenheim S&P Equal Weight Technology ETF (RYT) and the SPDR FactSet Innovative Technology ETF (XITK). The Guggenheim tech ETF is just like the energy one; it invests in companies found within the S&P 500 that are in the technology sector. The RYT currently holds 69 stocks. The XITK is much more risky, as it invests in companies that have been deemed innovative or disruptive by FactSet. This is a brand new ETF, with an inception date of 1/13/2016, so we don’t have a ton a data on the ETF, but these are the stocks that have been hammered lately, and could potentially change the world. Big upside, but big downside also.
At the end of the day though, the biggest issue is that the 2007-09 recession is still very fresh in everyone's minds and it was the last recession that we can compare things to. This thinking needs to be changed, as it is very unlikely we will have another recession as bad as the one we experienced a few years ago anytime in the near future. So, relax, stop panicking, the world is not coming to an end, stop selling equities, and go on with your life as you would if equity prices were rising, because they likely soon will be.
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.