Recession Watch
There has been constant talk about the upcoming recession for the last year or so. The focus of many industry publications I’ve read and events I’ve attended have been focused on this upcoming recession, however, this much talked about recession hasn’t materialized yet. An article I recently received in my inbox is representative of many others I’ve received, titled Why We’re Still Waiting on a Recession. Of course, we know we’ll have another recession eventually, but this so-far elusive recession seems to be the most highly anticipated one I can remember. The anticipation stems from the fact that the Federal Reserve has hiked interest rates at the fastest rate ever, with a goal of bringing inflation down. Many experts have believed the result will increase unemployment, and ultimately slow growth leading to a recession. This could still be the case, but so far this “slowcession” as some have named it, hasn’t arrived (at least as far as we know), and there is a chance the Federal Reserve will achieve the “soft-landing” they’ve been shooting for.
With all the talk of recessions, I wanted to take a look at what it could mean when we do eventually go into a recession. In my economics classes, we learned about the business cycle with nice smooth graphs like the one below.
It is also typical in economics classes to look at averages as a gauge, yet each event can vary significantly from the average. Since my time as a financial advisor, there have been two recessions. I graduated from UCSD in 2003, right after the tech bubble, and remember it well, so I’ll include that as part of the recessions I remember and experienced.
Time between recessions Duration Peak Unemployment GDP Decline
Average 6.5 years 11 months 8.4 -2%
Post WWII
Tech Bubble 10 years 8 months 6.3% -0.3%
2001
Great Recession 6 years 1 month 1.5 years 10% -5.1%
2007-2009
COVID-19 10 years 8 months 2 months 14.7% -19.2%
2020
Recessions are a reality in our economy, yet they can look very different each time around, and from what the “experts” forecast. Of note, the two recessions I’ve experienced since working in this industry (2005) have had higher unemployment and larger GDP declines than the average. This is hopeful in the sense that not all recessions are as jarring as the Great Recession and COVID-19. It’s also important to remember that official recessions aren’t usually declared until well after they’ve begun, and the stock market typically starts to recover well before the recession is over in anticipation of its end.
What should you do with this information? Rather than worry, overreact, or try to time your investment strategy, I suggest having a financial plan and investment strategy that acknowledges and accepts recessions as part of your financial life. Your investment strategy should include an appropriate asset allocation based on your timeline and objectives. It should also incorporate rebalancing, which essentially forces you to buy low and sell high. You should continue to contribute to your investments if you’re working. You should also look for tax planning opportunities such as harvesting losses that can offset future gains. You shouldn’t try to time the market. It’s a common story for people to tell me that they’ve had a poor investment experience due to doing the wrong thing at the wrong time, such as selling when the market was down only to miss out on the recovery (just look at 2020 when COVID hit, the stock market dropped almost 34% only to end the year up over 18%). And maybe most importantly, make sure you do what you can to build your personal economy on a strong foundation by having a cash reserve, avoiding consumer debt, and living within your means. If you have a strong financial foundation, it can help dampen the effects that a recession has on you personally.
If you feel unprepared for an eventual recession, email me at advisor@blakegallion.com to schedule a time to talk.
