The first two quarters of 2022 marked the worst start for the stock market since 1970. Stocks entered bear market territory, defined as a decline of 20% or more. The headwinds of inflation, interest rates, and war in Ukraine have injected a big dose of what the market hates most – uncertainty. Now we’re seeing a possible recession show up in more headlines. But is that where we’re headed? And, more importantly, what would that mean and what should we do?
What is recession?
Let’s first review what recession means. Recession is a widespread decline in economic production, usually measured by Gross Domestic Product, or GDP, lasting more than a few months. They vary in severity, but recessions are a normal part of the economic cycle.
Forbes showed that the average period of economic cycle lasts 4.7 years, with 3.2 years of growth and 1.5 years of recession. So, recession shouldn’t completely catch us by surprise, but the uncertainty surrounding many of them can cause anxiety.
Are we headed for recession?
Let’s recall where we’ve been in the last three years. We’ve been through a global pandemic, an economic shutdown where GDP declined nearly 20%, the recession in 2020 (albeit the shortest on record at just two months), and the long, slow process of reopening and finding our economic footing again. Coming out of the lockdowns, consumers made up for lost time in spending, which helped economic growth and recovery. But now we’re seeing prices spike, causing consumers to grow more pessimistic. We’re also seeing interest rates increase, which makes growth tougher for businesses.
These indicators should help us see that some level of recession could be expected. But how bad will it be? As CNBC reports, the opinions range widely, with Citigroup assessing a 50% chance of recession in the next 18 months, Goldman Sachs assessing a 30% risk, and UBS forecasting no recession at all. The team at CNR breaks it down this way:
- 20% chance of normal growth with no recession
- 30% chance of slow growth with no recession
- 40% chance of mild recession
- 10% chance of normal recession
CNR also shows that stocks decline somewhere around 30-35% in a normal recession. With a 20-30% price drop so far this year, depending on which benchmark you look at, we could see some level of further decline in the case of a normal recession.
What does it mean and what should we do?
With high inflation, interest rates, and global uncertainty due to war, we certainly have some headwinds to face. Whether that leads to a normal recession or just slower economic growth, it’s important to have a plan. Consider these three tips and resources:
- Recessions are a normal part of the economic cycle. The longer or more difficult ones are more painful. The shorter ones are forgotten in a moment. Each will lead to increased stock market volatility. Starting with this base of education can help provide historical context for what we might see next. For more, read Recessions – How Bad Are They & How Long Do They Last?
- Avoid common mistakes. There are a few common mistakes we see during a recession that you can avoid with proper planning and preparation. These include making short-term decisions with long-term money, like your retirement nest egg, and not having adequate reserves. Your financial plan should account for these risks. See Avoid These 5 Mistakes People Make in a Recession for more on this.
- Don’t go it alone. Our team here at Alterra is here to help you navigate difficult times and make sure your plan adapts to changing circumstances. Sometimes this means changes to strategy, other times it means simply confirming that you’re still in the right spot. Either way, we are here for you. And if you’re not partnered with an advising team, you’re welcome to contact us to start a conversation.
While no one knows for sure if we’re headed for recession, we do know that recession will happen at some point in the future. The right plan helps you to prepare, just in case, whether you need that plan now or down the road.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.