This article is contributed by Davis Byrd, Financial Planning Associate. 

Are we in a recession? What technically is a recession? These two questions have gripped economists, academics, and politicians alike recently, leaving many investors to draw their own conclusions, feeling like a deer in the headlights. A definite “yes” or “no” answer would be convenient, and it’s one that we deserve to know given the time and resources that we (as a country) invest into understanding our economy. However, for an investor concerned about the impact of a recession on their personal investment portfolio and financial plan, viewing a recession as a binary outcome is a reductive and potentially misleading approach. 

When someone wants to know whether we are in a recession, they are likely gauging their personal outlook for their financial wellbeing. They are more realistically asking the question, “am I going to be okay?” If we were assured the answer is yes, our interest in the technicalities about what defines a recession would surely fade. If you agree, then the more important question becomes “what can I do to protect myself from the impact of a recession?” Now we’re talking! 

Understanding the difference between the markets and the economy is a good starting point. Market participants often act on their expectations for economic data, buying and selling based on what they anticipate the data will be prior to an official release. In mass, the result is that the prices of stocks (and bonds as well) can be more sensitive to expectations for economic data than the data itself, and the broader financial markets are often more reflective of the state of tomorrow’s economy than of today’s. For example, in a study of the 11 recessions since 1950, the National Bureau of Economic Research (NBER) found that the stock market (S&P 500) peaked at an average of 6 months before the start of a recession and bottomed out at an average of 6.5 months after the recession begins. The average length of a recession since 1950 is about 10 months, meaning the stock market is typically rising for 35% of the full recession cycle. I mention this in hopes of illustrating that a fixation on the most recent economic data and whether it officially places us in a recession isn’t always proper guidance for an investor trying to make informed decisions about their portfolio, especially if viewed in isolation. 
Perhaps we’re on the cusp of a recession. Maybe we’re already in a recession. Either way, history shows us that by the time we know with certainty, the damage has already been done and the financial markets are much more likely at a trough than a peak. Hindsight is the only 20/20 when it comes to predicting the swings of our market and economic cycles, making it critical to plan and prepare for these scenarios rather than attempting to avoid them altogether.

At Pathfinder Wealth Consulting, our team of CERTIFIED FINANCIAL PLANNER™ professionals work closely with clients to understand their unique financial goals and create a customized financial plan that is stress tested against volatile markets and economic downturns. Our goal is to keep you focused on the path towards financial success. To learn more about how you can protect your financial wellbeing from the impact of a recession, give us a call at 910-793-0616 or visit our website today.  We are here to guide you forward.
 
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.