The Impact of a Potential Recession

From the naked eye, the financial markets look concerning. The S&P 500 is coming off its worst week since the early days of Covid-19 in 2020 and has officially entered into “bear market” territory, inflation is at a 40-year high, and interest rates are rising fast.

Are we headed for a recession? Bear markets often associate with recessions even though they aren’t directly correlated. As a brief refresher for those unfamiliar, a “bear market” is a term for a fall of more than 20% from a prior market peak.

A recession is defined as two or more consecutive quarters of declining Gross Domestic Product (GDP). The following causes have led to the most recent U.S. recessions:

• An unexpected shock (think Covid-19 pandemic)
• “Bubbles” that grow within the economy and then burst
  • Excess debt in the housing market (2008-09)
  • Tech bubble (2000-01)
• Unemployment Rising

Although President Biden shared, “there is nothing inevitable about a recession” in an interview last week (take that with a grain of salt), I wanted to explore that potential road further and the impact that can be expected if we reach a recessionary period. As our firm’s clients know, we like to be prepared and plan for worst-case scenarios since we rarely, if ever actually hit those metrics.

Fun fact – The United States has weathered 12 economic recessions since World War II. On average, these post-war recessions have lasted an average of 11 months, while periods of economic expansion have lasted 57 months!

For those interested in reading about each of the previous 12 recessions in more depth, this ‘History.com’ article is a great resource: https://www.history.com/news/us-economic-recessions-timeline. The longest recession in recent memory was the 2008-09 housing market collapse that lasted 18 months. The shortest on record was the March 2020 Covid-19 pandemic strike that lasted a mere two months.

Throughout our country’s economic history, we have reached official recession territory in less than 15% of all months. Average GDP reduction during those months: less than 2%. Average GDP growth during the expansion periods: 25%. This chart from Capital Group summarizes the power of expansion relative to past recessions:

The full Capital Group article can be found here: https://www.capitalgroup.com/advisor/insights/articles/guide-to-recessions.html)

Long-term market perspective is always important for reference. Since 1926, stocks have dipped into bear market territory every six years on average, with losses averaging almost 40%. Based on that data, market corrections occur on a fairly regular basis. Unfortunately, many people have fallen victim to recency bias of the historic 2009-2020 bull run, forgetting about the regularity of these market setbacks.

Facts aside, while we are living in our current day-to-day period of negative market performance, it can feel like a lifetime, especially for those of you already in retirement. The investment approach in our planning process is to find an investment mix that aligns with your goals, distribution timeline, financial situation and most importantly, your risk comfort level.

As we navigate this rocky start to 2022 in the markets, comfort levels are shrinking. Remember, relying on asset classes that aren’t directly invested in the market during these shorter-term cycles are what will bridge you to the next GDP expansion period. Although past performance isn’t a complete indicator of future results, history has repeatedly shown that it’s not a matter of if recovery and expansion will take place, but when.

I look forward to continuing to help navigate the bear market/recession path with you. As always, if you’d like to discuss how this relates to your individual circumstances, please reach out to our office. We are always here to assist in steadying the ship and keeping you on course.