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.
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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.
