As financial advisors helping people manage money, it’s our responsibility to not only talk about the good times, but also some of the tougher times. When we start talking about tough economic times, this “r” word often comes up — recession.
It’s something we generally don’t want to think about, but it’s definitely something we go through. As our economy moves into what looks like a bear market, it’s important to talk about some of the identifiers for how we know we’re in a recession as well as some of the things that proceed a recession.
For starters, a recession is a period of economic decline signaled by an increase of unemployment, a drop in the stock market, and a dip in the housing market — since 1854, the U.S. has been through 33 recessions. As we see the stock market, housing prices, and GDP (gross domestic product) all starting to decrease, we start to notice we’re in a recession.
Decrease in GDP
Technically, a recession is two quarters (six months) or more of GDP decline, which is one of the earliest signs of a recession. GDP is the output we have here in America. So, if our output is in decline for two quarters, then we’re in a recession.
The second thing we see is companies start to cut back. Business leaders and CEOs don’t want to hire quite as much. As they slow down their hiring, they slow down their business development. Maybe they don’t want to put as much capital into future capital.
The third thing we start to see is corporate cutbacks or layoffs. One of the biggest signalers that makes people notice a recession is when someone they know loses their job. In 2020, we went through a period where we saw unemployment numbers skyrocketing. It’s obvious we’re in a tough time when you call your friend down the street and they say they’ve been furloughed or laid off.
Increase in government debt
Next, we move into government debt. Government debt often starts to rise during a recession, and the Federal Reserve will cut its interest rates. When we see a cut in interest rates, that gives the consumer the ability to refrain from paying more in interest. To put it simply — interest rates are cut to help stimulate the economy.
Stock market volatility
And then, of course, the final thing we notice in a recession is the depreciation of our stocks. Homes are losing value, so assets start to depress.
There are two things to know about recessions.
As stated above, we’ve been through 33 recessions, and we will likely go through another one day. We’re going to go through tough times when the business environment starts to contract. It’s amazing how quickly our hearts start to race and we begin to panic when the markets dips. The world is not ending — recessions happen. They’ve happened many times before, and they’ll happen again.
As we go through recessions, we need to have an honest discussion with ourselves about our investments and assets, what they’re doing, and if they need to be there through the next six months to ten years. That’s a big difference in time, but it’s important to look at those benchmarks. We need to start asking ourselves if we own assets that are high volatility or if we own things like solid consumer staples to hold us through the cycle.
Don’t let the recessions scare you. Stay calm and confident — we’ll get through tough times. And if you’d like to hear a second opinion on your portfolio, give us a call today to schedule an appointment!