It’s time for a mid-year Market & Economic update. Investors have certainly been challenged since early January. With so much worry swirling around high inflation, the Russia-Ukraine conflict, the Federal Reserve actions and imminent recession risk, I want to provide you with data that matters and a review of history. With so much good content I have decided to create four separate and shorter videos. Our plan is to send you one video each week for four consecutive weeks.
Week 1 What just happened? Market & Economic update
Week 2 Let’s talk about Inflation and Rising Interest Rates
Week 3 Planning for a Recession
Week 4 Where do we go from here?
I hope you find this content educational and helpful. I want all of us to make good financial decisions so we can reach our long-term goals. Enjoy!
Hey, folks. Doug Pardieck with Talon Wealth Strategies. We’re in a video series here for the summer of 2022. This is the third video. We’re going to be talking about the coming recession and how to prepare for it.
Let’s just get into it. What is a recession? Recession is when the economy shrinks. It’s not growing anymore, but it’s actually shrinking. It could be a 1%, a 2% or back in the pandemic it was a big contraction. You have to have two quarters in a row for that to be a recession. When the recession comes typically six to eight months before that the stock market is going down in anticipation of the recession. Finally, when we do have the recession in the middle of that mess the stock market rebounds. The stock market is actually a leading indicator. The economy, the recession whether it’s growing or receding, that’s a lagging indicator. We never want to base our investments on, “Hey, if I’m in a recession I need to sell.” Or, “I think the recession is coming. I need to sell.” It’s so hard to predict when the recession is coming. That’s the biggest fear right now is with inflation being so high and the Feds raising rates, is the recession right around the corner. Let’s talk about that and let’s look at the math, the historical data that indicates whether a recession is coming or not.
Talking to Dr. David Kelly at J.P. Morgan, he says there’s three things that we need to see in place that is a strong indicator that the recession is coming. First of all we need full employment and check, we’ve got that. We’ve got full employment so that says, “Yeah, by that indicator a recession could be right around the corner.” The second thing he looks for is a shock in the economy. Something the economy cannot handle like the subprime lending crisis we had with housing back in 2007, 2008 and 2009. Then there was the pandemic of 2020. Right now he doesn’t see a shock that the economy can’t handle so that box is not checked. What about tight monetary policy? That goes back to the video that I had just last week talking about the Fed raising rates. Again, the Fed raises rates to slow down the economy, to slow down inflation. Inflation right now is very high. We all know that, but the Fed is technically not tight. What does it take for the Fed to have tight policy? Well, as they raise rates the higher it goes, the tighter it gets. Around 5% on the Fed rate, once it gets to 5% that is considered tight monetary policy. Below that – and right now we’re at 1% - it’s going to go up. They’re going to keep raising rates trying to curb inflation. Let’s say we go from 1% to 2%. It’s still pretty loose. Loose is good for money flowing through the system. Money flowing through the system encourages the economy to grow, not contract. So, two out of the three indicators right here tell us no, the recession is not coming anytime soon.
When I talked to Brian Wesbury at Frist Trust, I talked to Lauren Abbott, I talked to Fidelity. All their models and all the historical data suggest the recession is not coming soon. It’s down the road. It’s coming. There is a price to be paid for all the money that got dumped into the system. This pandemic, the federal response and the government response was to put money into the economy as a life support to keep it going. All that money, there’s eventually big consequences and we’ve got to pay for it. Right now the consequence is rising inflation, but we do not see a recession right around the corner.
However, we never want to predict and base our financial planning on predicting when the recession is going to hit. Whether it’s this year or next year or the year after that, we don’t know for sure. The data says later, but we don’t know for sure so we’ve got to prepare. We need income to get us through the recession. We need cash reserves to cover those expenses to get us through the recession. If you feel like you’re short of either one of those two things, then we’re not prepared for the recession.
When the stock market rebounds, and it will. I was going to say “if” but it’s “when.” When the stock market rebounds and our assets go up again, it might be prudent to sell off some of those investments at a higher price and to refill our cash reserves and possibly build some more income streams to get us through those difficult times.
If you have any questions or comments or you want to dig deeper in your financial plan about preparing for the recession, whenever it comes, we are here to help. Doug Pardieck with Talon Wealth Strategies. I hope you have a great summer and I’ve got one more video coming out next week. Stay tuned for that and we’ll talk to you soon.