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Stock Market Purgatory: How Did We End Up Here?

By Kevin Swanson, CFP®


Growing up in a Protestant household, I didn’t encounter the concept of purgatory until later in life. But as I learned about the Catholic belief of purgatory, I began to see metaphorical connections between purgatory and the economy — and, as you might have guessed by now, I enjoy a good metaphor!

purgatory: (in Catholic doctrine) a place or state of suffering inhabited by the souls of sinners who are expiating their sins before going to heaven. ~ The Oxford Dictionary of Phrase and Fable, 2nd edition

Comparing the economy to purgatory

In many ways, the idea of purgatory is eerily similar to an economic recession. Each recession could be considered a form of “sin” committed by the economy, such as the savings and loan crisis in the 1980s, the dot-com bubble in 2000 – 2001, or the subprime mortgage crisis in 2008 – 2009. These “sinners” drag the economy into a state of recessionary purgatory until their sins are atoned for and the economy can move toward a better, purer state.

Do you see the connection I’m drawing here?

What did we do to end up here?

So, what “sin” did we commit to end up in the current economic slowdown? Well, there wasn’t just one. Instead, we’ve seen a series of significant economic dampeners: The Covid pandemic, a broken supply chain, significant stimulus measures, stifling inflation, and the Russian invasion of Ukraine.

Whereas the economy came to a grinding halt during the deep recessions of 2001 and 2009, that’s not what we’re experiencing now. Over the past three years, we’ve seen certain sectors experience their own individual recessionary periods — but at different times, rather than all at once. This has created a “rolling recession,” meaning each sector successively goes through its purgatory period and then recovers. 

In 2020, the demand for services and consumer experiences drastically declined. In 2021, we saw slowdowns in the technology and large cap sectors. In 2022, we had a slump in residential and commercial real estate. And, 2023 has already delivered a crisis among the small banking sector.

And it’s this rolling recession, alongside record-breaking inflation, that is causing the overall equity market to stagnate and remain in stock market purgatory. As sector after sector successively slows or falters, our equity portfolios are painfully sluggish. But the alternative is much worse — when many sectors slow simultaneously, the economy is more likely to enter a deep recession. So, as difficult as this stock market purgatory is, perhaps the rolling recession is actually preventing a major downturn.

Waiting out stagnancy in the equity markets

We believe the stagnancy within the equity markets will reach a low point later this year and continue into 2024 — as we collectively atone for each sector’s failings. More specifically, during the second half of 2023, we foresee little to no growth in the real estate market and a slowdown in industrials. We also expect the retail sector and consumer spending both to slow toward the end of 2023 and into 2024. 

How does this affect our portfolios? Overall, we’re maintaining our conservative approach toward equities as we wait for the equity markets to recover. Yet the bond market must have purged its sins during 2022, because we continue to take advantage of considerable opportunities within the fixed income markets.

Let’s shoot straight: Are we entering a full economic recession?

Given the continued chatter among economists about a possible recession, it’s worth another quick mention. There is no denying that we are experiencing a period of economic contraction as individual sectors continue to falter, but whether this rolling recession evolves into a mild recession is yet to be seen. 

The unemployment rate remains historically low, consumer spending is stable, and the Federal Reserve’s efforts to curb inflation are working — all of these indicators point toward flat growth at best, or a mild recession at worst. And as I recently discussed in All Recessions Are Not Created Equal, there are significant differences between deep and mild recessions.

Our purgatory strategy: Patience and resolve

Viewing our economic slowdown through the lens of purgatory helps us understand the cyclical interdependencies of different sectors, as well as the need for both the patience and resolve to navigate this challenging period. 

Rest assured that as the markets expiate each sector’s sins, we are remaining vigilant and adaptable to the ever-changing landscape of this rolling recession — always watching for areas of possible investment opportunity. And, of course, we eagerly anticipate our collective release from stock market purgatory and a brighter economic future.

The content is developed from sources believed to be providing accurate information. Potentia and Potentia Wealth do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.

Investment advice offered through Mariner Independent Advisor Network, a registered investment advisor. Mariner Independent Advisor Network, Potentia Wealth, and Potentia are separate entities.

©2023 Potentia Inc.

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