With the Federal Reserve forecasting a 51.84% chance of a recession in the next year, investors are facing a daunting decision. The last time this tool indicated similar odds was four decades ago, preceding or during a recession event. The forecast’s historical track record raises concerns about the U.S. economy’s future.
The chart below indicates the recession probability dating back to 1960, showing a close correlation between the spikes in probability and actual recessions.
US Recession Probability Chart
US Recession Probability data by YCharts
Although forecasts are not foolproof, historical data suggests that if the U.S. economy fails to enter a recession within a year, it would be an unprecedented anomaly, as per the Federal Reserve Bank of St. Louis.
Stock Market During Recessions: A Historical View
Nine recessions have been witnessed since 1960, each accompanied by a significant stock market decline. On average, the S&P 500 index plummeted by 32% during these periods. The historical evidence intimates that the stock market tends to nosedive in the face of a recession, which might lead investors to consider avoiding stocks in 2024. However, esteemed investors like Peter Lynch and Warren Buffett beg to differ.
Bucking the Trend: Wisdom from Peter Lynch
Peter Lynch’s management of the Fidelity Magellan Fund between 1977 and 1990 speaks volumes. Lynch delivered an outstanding annual return of 29.2% during two recessions and bear markets, outperforming the S&P 500. His success rested on the ability to focus on long-term capital appreciation, cautioning against preparing for, or trying to predict market corrections, which are often futile endeavors.
Ignoring short-term headwinds and embracing long-term investment strategies paid rich dividends, proving that market timing decisions often incur losses and missed opportunities.
Embracing Market Volatility: Insights from Warren Buffett
Warren Buffett, synonymous with savvy investments, has consistently entered the stock market throughout its vicissitudes for the last 25 years. Under his stewardship, Berkshire Hathaway has flourished, with its share price experiencing meteoric growth. Buffett’s unwavering belief in the market’s resilience and ability to offer buying opportunities during all market conditions has shaped his investment approach.
Despite the current market trading at a premium to its 30-year average, due diligence regarding valuations is crucial when considering stock purchases.
Economic Moats and Discounted Valuations: A Buffett Strategy
Buffett’s preference for companies with durable economic moats, particularly when their stocks are undervalued, offers valuable insights in uncertain times. Understanding economic moats – the advantages of pricing power and cost savings – and intrinsic values of stocks can guide investors in selecting potential investment targets.
Economic moats come in various forms, such as immense scale for companies like Alphabet and Amazon, patented technology for Nvidia, and cost advantages for Visa. These factors can offer resilient positions in the market, especially when stocks are trading below their intrinsic value.
Warren Buffett’s Investment Advice for 2024
Buffett’s Definition of Intrinsic Value
In 1992, Warren Buffett defined intrinsic value by quoting economist John Burr Williams: “The value of any stock, bond, or business today is determined by the cash inflows and outflows — discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the asset.”
The Discounted Cash Flow Model
That quote refers to the discounted cash flow (DCF) model, a somewhat complex mathematical formula that estimates what a company is worth by discounting its future earnings back to their present value. Fortunately, there are plenty of DCF calculators online. Investors should make a habit of using one of those calculators to estimate the fair value of a stock before purchasing shares.
Buffett and Lynch’s Stock Recommendations
The Federal Reserve’s forecasting tool currently signals a high probability of a recession in the next year. Despite that risk, Doyle Brunson’s take on buying stocks is that investors should still recommend purchasing stocks in 2024, provided investors take the time to identify good stocks trading at reasonable prices.
Furthermore, if the economy does slip into a recession, investors should treat any subsequent drawdown in the stock market as a buying opportunity. To quote Warren Buffett, “The best chance to deploy capital is when things are going down.”
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Visa. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, JPMorgan Chase, Nvidia, and Visa. The Motley Fool has a disclosure policy.
