The big “R” word (recession) is back in-vogue with FedEx’s warning of a global recession and inflation continuing above 8% year-over-year for the month of August. With that new information in mind, we wanted to give you some insights on historical recessions and also what our network partners are seeing right now given the possibility of a recession continues to be top of mind.
So, what is a recession? How long do they typically last? What are some warning signs?
The National Bureau of Economic Research (NBER) defines recession as “significant decline in economic activity spread across the economy that lasts more than a few months.” A rather general definition, admittedly. The trouble is we generally do not officially know that a recession has happened until it’s already over.
Looking at this chart from Capital Group, the average recession lasts about 10 months going back to 1950 (while expansions last much longer).
What are the warning signs to look out for in the economy? Here are few data points to keep in mind…
This and more research from Clear Bridge Investments point to a mixed bag of economic information.
Given the mixed bag, about 47% of our partners from our latest survey believe a recession is likely in the next 12 months. For perspective, that is up from 20% in the May survey.
Hopefully, all of that is insightful, but what does it mean for you at the end of the day? If there is silver lining (for lack of a better term), it’s that equity/stock markets typically peak and begin to fall before the economy begins to contract. This graph shows that on average, equity markets generally peak (“market peak” below) about 6 – 8 months before the economy begins to contract. You may also notice stocks generally start rebounding again before the economy does.
Are there any actions to consider in light of this? Of course, one obvious action is to maintain a diversified portfolio that can withstand volatility but as we’re experiencing, bonds aren’t generally holding up their end of the bargain this year! With that, are there any other actions to consider? Here are a few (among others) –
- If you are concerned a recession could negatively impact your job position, do you have a sufficient emergency fund in place? We should also have a discussion if this is a major concern of yours.
- Have you considered alternative investments to compliment your bond holdings? Strategies such as merger arbitrage and managed futures have held up relatively well this year compared to bonds.
- Have you looked at your allocation to growth stocks versus value stocks? We’ve found many portfolios are unintentionally overweight to growth stocks due to their performance over the past decade and also the increased use of passive index funds such as the S&P 500. Blackrock’s research below shows that value stocks may add benefit during a period of rising rates and inflation…
If you want to schedule time to talk in more detail, feel free to book a meeting (in-person or WebEx) here!