A recession is on the horizon for 2022, peeking over the ocean’s edge. In the same way an earthquake precedes a tsunami, we’re currently experiencing the signs of this economic turn. The looming questions are how high will the tidal wave be, who will be impacted and how long will it inevitably stick around?
There have been 11 recessions since 1948, averaging out to about one recession every six years. At first glance, it sounds ominous or alarming, especially for those of us experiencing slight PTSD from the Great Recession of 2008 in which many families saw the value of their homes or retirement savings plummet in the matter of days. However, the Recession of 2022 is going to be different, and we’ve seen it coming for over 15 years. In this article, I share ways you can prepare for the worst and still keep your head above water.
What causes a recession?
A recession refers to a significant decline in general economic activity. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment. However, the National Bureau of Economic Research (NBER), which officially declares recessions, defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
During the Great Recession of 2008, I was a newly licensed financial adviser with only one year under my belt. Families and individuals were asking me for clarity as to why their investable assets had fallen over 50% in just weeks. Most of them realized that their understanding of risk was NOT aligned with how they were actually allocated. They thought they were ready for risky investments, but that recession came as a shock, when those risky investments took a turn for the worse. For many investors under the age of 40, this means that your finances have not been stress-tested to give you a strong sense of how much risk you are willing to take to achieve the returns you would like.
The reason the Recession of 2022 has been developing for over 15 years is because the federal governments have been quantitative easing (QE) financial markets. In other words, our government has been injecting trillions of dollars into the economy to smooth out potential fears from the 2008 financial crisis and the 2020 global pandemic. QE reduces interest rates, increases the supply of money and drives more lending to consumers and businesses. The result was asset inflation, or the appreciation and growth of real estate and stocks. For example, for every $1 that was injected into the system stock value grew by about $0.92.
What this means is that the value of stocks and real estate has grown in proportion to the amount of many that was stimulated into the economy. Now, the Fed is looking to pay down our deficit that was created by printing so much money. This means that they will now be reducing of the amount of money circulating in the economy, which means the value of assets will fall as well.
What’s the recession mean for the economy?
The Good: The great news is that a recession should cause the price of goods we pay for to go down, which means lower grocery bills, products and services. People reduce their spending during a recession because the amount of disposable income is reduced. Companies will be forced to compete and reduce their prices on the goods or services they provide so that they can sell and attract more customers.
The Bad: The bad news is that this recession may not be as short lived as some may think. Some can remember the Recession of 2001 when the tech bubble burst and the first two to three years were grinding. This time it can be the same unless the Fed pulls out a Band-Aid for more quantitative easing (QE), injecting more money into the economy. If this happens, we can potentially see confidence come back and stocks could rally.
The Ugly: If the Fed opts for doing quantitative easing, then the recession may be a quick but we are still left with a huge deficit that we will need to deal with… essentially back right where we started.
What should I do, and should I be worried?
Whether or not you and your family should be concerned depends heavily on the point you are in life’s journey and your ultimate financial goals. If you are not happy with your 401k or brokerage account values today, then you might need to get ready for some more pain if we see inflation continue to rise. However, if you have about 7-10 years to spare before retirement, you may just weather this disaster.
RETIREMENT: If you just entered retirement or plan on doing so in the next couple of years, then make sure you are getting a thorough second opinion by a financial professional so that you are appropriately allocated for a recession in your early retirement years. The worse thing that can happen to your money is withdrawing during a negative market, especially a recession. This could significantly reduce your ability to withdraw income over the long run.
MIDDLE-AGE: If you are in your 30s, 40s or 50s, you are in luck! The reality is that recessions are where millionaires/billionaires are made because companies are being stress-tested, and many won’t survive. For the ones that do, they can lead the world in technology and innovation much like we saw Microsoft, Amazon and Google do after the tech bubble burst of 2001 (also known as the DotCom Bubble). Consider the future tech of our society, including electric vehicle takeoff and landing (eVTOL), crypto, genomics and other high-tech options. Generally, growth companies lead the charge after a recession and these sectors can be ones that recover early because it was impacted the most.
BUSINESS OWNER: If you are an entrepreneur and have employees, the recession can impact you in various ways, including attracting talent (people will be less willing to risk moving to another employer) and raising capital (lending has tightened and investors will most likely be keeping money in cash to stay afloat over the next 2-3 years). If you are worried or concerned about these issues, I suggest you become proactive as opposed to reactive by working with a coach or consultant and get ahead of these potential challenges before they become significant issues.
EXPERIENCED WEALTH INVESTOR: If you have a significant amount of your wealth allocated in the financial markets, you are going to want to have a close relationship with your money manager. It’s easy to manage money when the market goes up, but it’s how money is managed on the downside that separates the winners from the losers. I have sat at both sides of the table and learned some painful lessons, but experience is priceless.
At any stage in your financial journey, I would recommend getting a second opinion on your current investment strategy from a financial adviser. Do it soon. If you don’t know one, ask for a referral or introduction from someone you trust like a family member or friend. Your investment accounts will thank you.
About the Author
Tony Lopez is a retired financial adviser and has a full-time business and financial coaching practice. Tony was in financial services for 14 years, where he created and monitored financial plans for over 250 households. In addition, he managed a team of successful financial planners focused on serving high-net-worth individuals and small-midsized businesses. He works remote and spends time in San Francisco, Miami and Tulum.
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