Yes, a recession is coming. I can say with (almost) certainty that a recession is coming. But do I know when, how long, or how bad it will be? No.
Here’s my point: recessions and market volatility are normal parts of the economic cycle and investing. Neither are fun, but they should be expected and more importantly, cannot be avoided. Out of curiosity, I recently Googled, “is a recession coming?” The search returned 99,000,000 results in about 0.46 seconds. I saw everything from “a major recession is coming” by CNN, to “3 charts that explain why the US isn’t on the brink of a recession” by Business Insider. Everyone has an opinion, and the media loves to broadcast the flashiest adjectives to generate interest (and perhaps to drive fear).
But like forecasting the weather, no one really knows. We can make an educated guess, or even form an opinion based on historical patterns and theories, but in the end, it is still a guess. To use a coastal analogy, forecasting a recession is like forecasting a hurricane. We all know that a hurricane is going to hit our coastline at some point in the future. What we don’t know is how bad it will be and precisely when it will hit. During hurricane season, do we alter our lifestyle, our spending characteristics, or our day-to-day mood based on the fear of when the next hurricane will hit? No, we soak up the summer sunshine and carry on with our lives. Each year it seems forecasters predict “the worst hurricane season ever.” They surely don’t make those claims with any real certainty. Some economists share the same negative sentiment about the economy, every single year. Will they be correct at some point? Probably. Over the past 75 years, we have had 11 recessions. That’s an average of one about every 7 years. Just like hurricanes, some have been bad, some have been not-so-bad; some have been short, some have been long. And by the way, there have been a lot more hurricanes than recessions.
But to humor you for a second, the Bureau of Economic Analysis just released the initial GDP reading for the first quarter of 2022, and it came back at a negative 1.4%. This is following a 6.9% increase for the fourth quarter of 2021. Recessions, by definition, are two consecutive quarters of negative growth (measured by Gross Domestic Product or GDP) in the U.S. That means one more quarter of negative growth and the United States will officially be in a recession. Does it feel like we’re in a recession? Not to me. Employment numbers are good, wages are good, and consumers are still spending. The only thing that’s causing economic hardship right now is inflation, and that arguably isn’t as bad as the headline numbers, because wage increases coming out of the pandemic (thanks, stimulus) have been able to keep up with higher costs, so far.
You might be saying, isn’t your job as a financial advisor to get ahead of market drops and avoid them? Absolutely not. The job of financial advisors, in many cases, is to keep clients from making emotionally charged mistakes that can cause dire setbacks to their retirement plans. Our job is to manage investment risks appropriately, by taking advantage of market movements, not avoiding them. Markets and money have a knack for making people do irrational things, and our job is to be the voice of reason and talk investors off the ledge when the future is uncertain, and fear is rampant.
What else can you do? The first thing is to make sure you’re comfortable with your investment strategy and your financial plan, through the good times and the bad. Most investment companies love to advertise the potential upside of their strategies, and while that’s important, it’s also important to know the potential downside. At Pathfinder, we test our clients’ financial plans with a variety of different market scenarios, including recessions and market downturns. We want to make sure our clients can ride through these periods of time without having to make untimely shifts. If you need a second opinion on your investment strategy or financial plan, please give us a call at 910-793-0616. We are here to guide you forward.