Pending Recession. Really?
For the past year or so, we have heard that the U.S. economy is headed for a recession. We have had many discussions with clients, and it seems to be reported in every channel of our media platforms. I recently read a financial article that talked about the “pending recession” like it was just a simple fact of life, and we are just waiting around for it. Pending? Really? What’s interesting to me is after being in business for thirty years, there is so much talk of this happening ahead of time. What I also find relevant is that there is rarely any context to what a recession is, how it affects the economy, or how the different markets behave during them. It might be valuable to share some thoughts.
Since around the 1950s, we have had ten recessions or so in the United States. That’s roughly one every six years. They have happened for different reasons, such as inflation, asset bubbles, low consumer confidence, etc. They have also lasted for various lengths of time. The average has been around ten months in the period I described. So, what is a recession? The NBER’s (National Bureau of Economic Research) traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and lasts more than a few months. It has also commonly been defined as two negative quarters of negative economic growth in the economy.
How do stocks behave during a recession? The results are mixed. In some recessions, stocks have had positive returns. Not only that, but like all other historic times, different sectors perform better than others, and being diversified can prove valuable. So, the question is, are we headed for a recession? My answer is maybe, to probably, as the Federal Reserve has raised interest rates to a point where economic slowdown may be the outcome. However, the real question is, what does it mean to you and your long-term financial plan? This is a different question than how we measure shorter-term economic information.
At our practice, we are continuously studying economic data and determining how to best guide our clients. This includes how to invest funds in different economic environments. As you may have heard me say, we work in “all weather” in pursuit of helping our clients reach their goals, including recessions. We work closely with money managers, analyze information, make intentional asset allocation decisions based on the available data, and seek to provide planning that provides opportunities for long-term success. We use these guideposts and always will, as we take our client goals very seriously.
As we continue to move forward, you will probably be hearing even more noise about the economy and a possible recession. And that could very well be. However, we prefer carrying an umbrella vs. building an Arc, as this is a natural part of our economy. Like so much in life, context is important, and this is a great example of that.
Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten