The R Word
It is at the tip of everyone’s tongue. It is the lead story every night on the news. Of course, I’m talking about a recession. Beyond the sensationalist headlines and the actual financial pain felt by millions of Americans lies the question: “What can I do about it?” A pragmatic approach shifts the focus from worrying to doing. These periods are never fun for anyone involved, but they are expected throughout history. With that, let’s examine what defines a recession and what it means for you.
Recessions are defined by the National Bureau of Economic Research (NBER), which pores over data and makes the determination many months after the fact. While a helpful rule of thumb, the accepted wisdom of two consecutive quarters of negative Gross Domestic Product growth defining a recession is not entirely accurate. I make this distinction because it is impossible in real-time to say for sure if we are in an official recession or not. Furthermore, at the risk of being flippant, does it really matter? Does an official determination by the NBER in the distant future change our actions in the present? I would argue, “no.”
Recessions occur, on average, once every five to six years. If we are in one currently, it would represent about two years after the last lockdown-induced recession in 2020. Prior to that, we had the “Great Recession” of 2007-2009. They are naturally occurring events of the business cycle, but each will have a distinctive fingerprint based on various factors given the economic environment at that time. Many people go to great lengths to forecast their beginning and end. However, energy is best used focusing on the details that help you and your family survive and prosper when the expansionary cycle begins anew.
For most, the number one risk in a recession is losing a source of income. While we might not be able to control the eventual fate of our employment, we can take measures to improve our prospects in the job market or with our current employer. This can include obtaining an additional certification or refining a current skillset with on-the-job training. This step might take a while to bear fruit, so getting started sooner than later is advisable.
Budgeting is an essential tool for success in good times, but even more so in lean times. Examining your spending habits can identify the fat to be trimmed if the proverbial belt needs to be tightened. The earlier you can start, the better.
Evaluate your investment mix. The prior six months have reminded us of the risks of investing. Even those with a prudent mix of stocks and bonds felt the pain as both stocks and bonds declined. Six months is a blip on a long-term investor’s timeline, so any rash decisions based on recent history will have long-lasting implications. However, prudence doesn’t necessarily mean inaction. Similar to the budgeting process, there may be some fat to be trimmed and better positioned for the months and years ahead.
My two sons are a joy, but sometimes they make my life difficult. Not unlike recessions and bear markets, their tantrums are part of the overall package – I can’t cherry-pick the good times. When the inevitable meltdown occurs, it is best to deal with the situation with a level head and an eye toward the future. Be sure to reach out if you need further guidance during this difficult time.
Author: David Rath, CMT, CFA
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