It happens to all of us: waking up in a sour mood. The causes can be many. Maybe you went to sleep the night before, brooding about a problem at work. Maybe your family has gotten on your last nerve. Maybe you realized, as you staggered into the kitchen, that you forgot to get coffee at the store yesterday. For whatever reason, your day has gotten off on the wrong foot.
Similarly, for much of the past year and continuing to the present, investors and other market-watchers are worried that the US economy is in a lousy mood. Once again, the causes are manifold: stubbornly high inflation and a resultingly hawkish Fed; rising interest rates (see also: “hawkish Fed”); increasing labor costs and a tight job market… the list could go on.
It might help to recall some history. First of all, recessions are a normal part of the business and economic cycle. Just as the stock market can’t go up forever, the economy can’t stay in growth mode indefinitely—though we might wish it otherwise. Going all the way back to 1857, the average length of a recession is a little less than 17.5 months. Since World War II, the average is lower—just less than a year (probably attributable in large part to the establishment of the FDIC during the Great Depression). Every so often, the economy requires “pruning,” and recessions are a principal way that process plays out.
And let’s also consider the flipside: business expansions. The good news is that they tend to last much longer than recessions, averaging four to five years in length. The longest business expansion in history, according to the National Bureau of Economy Research (NBER) was slightly longer than 10.5 years, ending in February 2020. You might remember another worldwide event that started about that same time—the COVID-19 pandemic/lockdown.
So what should you do? Just as you can’t always control the way you feel, there’s not much you can do about the principal causes of a recession. You can’t change the rate of inflation, and you can’t alter Fed monetary policy. But you can control your reactions to these circumstances. You can make decisions based on sound financial and investing principles, rather than the latest headlines in the financial media. Here are some constructive steps that can help you get through any recession and better position yourself for the expansion that will follow.
- Retirees, take a careful look at your strategy for drawing income from your retirement savings. You may want to prioritize sources that offer less potential for growth when the economy turns around, keeping in mind that you’ll need that growth in later years, to make sure your assets keep pace with inflation.
- Channel your “inner Warren Buffett.” Even in a recession, bargains are still available, and you’ll need to maintain appropriate market exposure now in order to capture growth opportunities later.
- Remain disciplined and optimistic. Remember that recessions don’t last forever, and panic selling is never a recipe for success. If you’re still satisfied with your asset mix and it still fits your long-term objectives, there’s probably no need to do a major overhaul in order to “recession-proof” it.
- Review your budget. If you can cut back on spending in some areas, do it. Consider boosting your emergency fund. Exercising some control here can help you feel less vulnerable during the downturn.
Finally, one of the most important steps you can take in preparation for a recession is to have a good talk with a qualified, professional, fiduciary financial advisor or wealth manager. The perspective of an experienced professional with access to the latest research can go a long way toward helping you see beyond the short-term challenges to the long-term possibilities. At Griffin Black, we provide our clients with evidence-based guidance, always delivered with their best interests foremost. To learn more, click here to read our recent article, “The Importance of Staying in Your Seat when the Rollercoaster Is Moving.”