The widely accepted definition of a recession is a period of temporary economic decline often led by a reduction in trade and industrial activity, generally identified by a fall in GDP in two successive quarters.
With talk of a new recession heating up by the day, it can be hard to know who or what to trust. That’s why we decided to go straight to the source, getting input from four of our Roundtable™ advisors from across the country. The question we asked them was simple: are we in a recession?
Are We in a Recession?
David Baker – Boston, MA
Senior Vice President, Financial Advisor and Portfolio Manager
We may be in a recession defined by its technical term of "two-quarters of negative growth.” My guess is we will report very close to zero growth in the second quarter of 2022 and could fall on either side of the line.
Marti Awad – Denver, CO
Senior Vice President, Financial Advisor
It is unclear at the moment. Based on the definition, we are in a recession. Today’s second quarter GDP advance estimate showed that the economy shrank by 0.90% on the heels of a 1.6% contraction in the first quarter of 2022. It should be noted, however, that while the first quarter downdraft was primarily related to a record-high trade deficit and inventory buildup, this quarter’s weakness was driven by a reduction in business, government spending and a cooling in home sales. Indeed, the highest inflation we’ve seen in decades and the rapid increase in interest rates is also impacting the economy.
However, it’s difficult to argue we are in a recession when employment continues to be robust with strong jobs growth, wage gains and a 3.6% unemployment rate—and this was noted by Federal Reserve Chair Jerome Powell on Wednesday, July 27, 2022, when he dismissed the view that the U.S. economy is already in a recession.
David Geller – Atlanta, GA
Director, Behavioral Wealth Management
Sometimes, it is hard to know when you are in a recession. The primary definition is a backward-looking measure. So, by the time you realize you are in one, it might already be over if the economy has turned. More importantly, it doesn’t matter.
If we are in a recession, nobody knows when it will end. Maybe next month, maybe in six months, or maybe next year. To some extent, it will end when the excesses built up in the economy are wrung out, and demand exceeds supply for homes, cars, household goods, and experiences such as entertainment, travel, and dining. Never forget that recessions are not all bad. They force companies to make those difficult choices about becoming more efficient. They help remind us that what really matters in life is not the size of our home but the quality of our most important relationships. It is not the car we drive but our sense of mission and purpose that drives us. They help us remember that even when times are tough, we are fortunate to have a place to sleep, food in our belly, clothes on our back, and love in our hearts.
How Is This Recession Similar to Previous Ones? How Is it Different?
Ayako Yoshioka – Los Angeles, CA
Senior Portfolio Manager
In my 25+ years following markets, no two recessions have looked the same, but they all have something in common: a deceleration of economic growth. We believe this current slowdown is a more typical business cycle recession that is correcting the excesses that occurred following the last event-driven recession of 2020, which was caused by the pandemic. The downturn and recovery of the 2020 recession were swift, while the '08/’09 recession that had to reset structural issues within the financial system had a much longer road to recovery.
Marti Awad – Denver, CO
Senior Vice President, Financial Advisor
Clearly, the last few recessions have been unique. The Covid pandemic sparked the 2020 recession, and the profound 2008 Financial Crisis was the result of a long-lived housing bubble and systemic risk in the banking sector.
This time around, if we are in or are headed for a recession, we can blame Putin’s war in Ukraine for exacerbating pandemic-related supply chain issues and creating new shocks to the global economy—particularly in commodity markets.
David Baker – Boston, MA
Senior Vice President, Financial Advisor and Portfolio Manager
If we do experience a recession, it will be much milder than most recent recessions. People tend to remember the most recent experiences and think the current scenario will replicate. If you look at recessions throughout history, they tend to be on the milder side and not disruptive. However, the most recent experiences of 2008/’09 and 2020 were very different animals and were more severe.
In ’08/’09, we had the threat of our financial system folding in on itself, and through some hard work and luck, we avoided catastrophe. The most recent recession in 2020 came from the Covid lockdown, and it really was a mini depression, which was all self-induced. We emerged swiftly from this depressed state due to massive government stimulus. The irony of this all is that this massive stimulus, combined with lockdown during Covid, has contributed to the current problems we're facing. Coming out of Covid, we had a massive dislocation in the supply/demand equation. The lockdown ceased production of everything, and when consumers with full pockets of cash emerged ($2.7 trillion of liquidity, according to data from FactSet collected on July 28, 2022), the demand usurped supply, thus spiking inflation.
What Should People Do to Curb the Recession's Effects and Stay on Track with Their Financial Plans?
David Baker – Boston, MA
Senior Vice President, Financial Advisor and Portfolio Manager
A recession should be viewed as an opportunity. A vast majority of our clients come to us to construct a well-architected portfolio to serve long-term goals. A recession can be an opportunity to invest in some of the best companies and assets in the world—at discounted prices. We are in a long-term game, and to be successful, it is critical not to get too swept up by short-term market moves, not to let emotions get the better, and to remain focused on long-term discipline.
Ayako Yoshioka – Los Angeles, CA
Senior Portfolio Manager
The optimist in me wants to point out that there is a recovery with every recession, so the doom and gloom doesn't last forever. Also, conversations with a financial advisor can help alleviate concerns and help navigate what is best for each unique situation. It is always important to align your financial plan with your individual milestones and goals and your risk tolerance.
Marti Awad – Denver, CO
Senior Vice President, Financial Advisor
Clients should remember this spike in inflation will not last forever. Several years ago, we were worried about deflation, a far more pernicious challenge. It may take a few years, but we should get back to a long-term trend of a 2–2.5% rate of inflation.
In the meantime, having a sound financial plan and following that plan is critical during these difficult times. You can adjust your portfolio—perhaps by adding some inflation protection—but do not sell your investments. Don’t let fear derail your plan. History shows us that in the 12 months following a recession, the stock market typically has a sharp snap back. If you can substitute lower-cost goods and reduce expenses, that is always a good idea. And now may be an excellent time to undertake some tax planning strategies—harvest tax losses and look at Roth conversions while the value of your portfolio is down.
David Geller – Atlanta, GA
Director, Behavioral Wealth Management
First and foremost, turn off TV news, turn off social media, and focus on what matters to you. Television news and social media are designed to upset you and get you agitated. Just say no and stop listening to the predictors of impending doom. You don't have to watch or listen. Instead, tune them out and tune into what matters to you. Take the time you spent watching TV or listening to the speaking head of the hour and refocus it on time with your significant other, your children, or your interests and hobbies.
From a financial perspective, the right answer is probably to stay the course. Don't overreact to short-term market movements. Chances are, you are not looking to spend your entire nest egg in the next few months—or even years. Continue to invest systematically, rebalance your portfolio once or twice a year, harvest tax losses if they become available, etc. But most of all, relax. Today's crisis will likely become tomorrow's forgotten memory.
