You’ve probably heard it a lot more lately, the nine letter, three-syllable word that strikes fear into the heart of almost every American: Recession. But what is a recession, exactly, and what should we be looking out for?
The National Bureau of Economic Research defines a recession as a decline in economic activity as measured by the gross domestic product (GDP) lasting for at least two quarters. These periods are characterized by high unemployment rates and dips in the stock and housing markets.
Recessions are preceded by periods of inflation, where there is a general increase in the cost of goods and services. In order to bring down inflation, the Federal Reserve and other central banks raise interest rates to intentionally slow the economy which usually results in a recession.
Looking back through history, we can see that recessions are a normal — albeit painful — part of the business cycle. Since the conclusion of World War ll, the U.S. has seen 13 recessions. The good news is, we’ve managed to recover each time. And since this is far from new, we know what to look out for.
Our current economic state doesn’t look like a traditional recession so far, with the unemployment rate coming in at 3.5%, the lowest it’s been in 50 years. Despite that, we can see why economists are so sure about a recession occurring in the next year. The Fed is determined to bring down inflation and therefore slow the economy, which will most likely cause some type of recession.
The Bureau doesn’t declare a recession until long after the downticks begin, sometimes not until after the recession has drawn to a close. This was especially the case in 2020, where the U.S. recorded a two-month recession — the shortest on record. There’s a possibility we’re in one right now.
The Stock market tends to lead the way with recessions, meaning it goes down before a recession is declared and it has historically gone up before a recession is officially over.
Many economists believe the U.S. will have a softer recession than the rest of the global economy. In early 2022, we discussed and sold some of your investments while holding onto quality investments with a long term perspective in mind. But everyone has cash on the side waiting for this opportunity. Our priority for the first half of the year is to watch for opportunities in key areas. The first is when to invest back into the bond market. The second is to buy U.S.-focused exchanged-traded funds, mutual funds and some opportunistic and dividend paying stocks.
I know this last year has been stressful and very much the “choppy” year as I called it. In some ways, it’s been choppier than we expected. But you can rest assured that we at Adventure Financial are monitoring these key economic numbers and are watching for buying opportunities. As mentioned in previous communications, patience is the most difficult job we have right now.
Markets have cycles, as I explained earlier, and this is definitely one of its more emotional phases. I stand firm in my belief that strong survival during these times requires structure and attentiveness. Sticking to this got us through the turmoil of 2008-2009 and should help us again in the upcoming year.
Happy New Year, and thank you for your trust.