The National Bureau of Economic Research (NBER) currently defines a recession as “a significant decline in economic activity across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, etc.” Historically they defined a recession as simply “two consecutive quarters of decline in real Gross Domestic Product (GDP).” Regardless of how it is defined, what does a conversation surrounding recession mean to your average investor and household, and how should they respond? Below we’ll attempt to bring some clarity and ease the concerns about the dreaded “R” word.
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
Investors
For investors, much of the concern surrounding inflation and a mild recession is already priced into the markets as evidenced by the approximate 20% decline in the broader stock market. What is not priced into the markets is a significant degradation of corporate earnings due to persistent longer-term inflation and low growth opportunities due to a considerable increase in unemployment.
Recommendation: For investors with a reliance on their portfolio in the short term (currently or over the next 12-18 months) consider having at least three years of your cash flow need set aside in safe assets such as CDs, money markets, short term/high-quality bonds, etc. For investors without a short-term reliance on their portfolio, look past the current weakness in the stock market and add to positions through a dollar cost averaging plan.
Workers
While the labor market is currently tight, there are signs that companies could be tightening their belts in expectation of a recession. In fact, a recent article by NPR highlights recent job cut announcements from companies such as Tesla, Netflix, Peloton, and various crypto companies. While current job cuts are primarily confined to companies rising to prominence during the pandemic, there is also a concern job cuts could extend to more traditional areas of the economy as the Federal Reserve continues its fight against inflation.
Recommendation: Evaluate the historical response function in your job sector during past recessions and then evaluate your job security within your specific company. If the sector you are working in historically suffers mass layoffs and you have minimal job tenure, you may be more vulnerable to a recession than others.
Households
Regardless of your position on job vulnerability, households should be conscious of their budgets to ensure a reduction of income, or that a period of transition/unemployment does not cause serious life disruption.
Recommendation: Reduce debt, particularly high-interest debt including credit cards, etc. as much as possible. Avoid taking on any additional unnecessary debt and make sure all expenditures are meaningful and truly add value to your life.
While it is still unclear where inflation and a possible recession could take us, it is important to be prepared for the worst. For tips on how to combat inflation and how to prepare yourself and your family for possible recession, contact a Certified Financial Planner to help get you on the right track.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch“), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch‘s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch‘s website or blog or incorporated herein, and takes no responsibility.