Bloomberg — The United States Federal Reserve (FED) has just raise interest rates in a maximum of 22 yearswhich raises the fear that a recession is just around the corner.
The goal is to curb rampant inflation, but many have expressed doubt that the Fed will manage to orchestrate the so-called “soft landing”, that is, lower prices without damaging the economy. As these issues rage, financial advisers say now is a good time to prepare for a possible financial downturn.
“Any time you go into a period of monetary tightening or tightening, you have to dust off your recession checklist,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “There are ripple effects to everything, not to mention the psychological impact for the consumer.”
What is a recession?
The “R” word invokes fear of job loss, falling stock markets and economic pain. Much of this is due to the relatively recent experiences of consumers with the long, slow exit from the financial crisis of 2008, which was dubbed the Great Recession.
“Recession” is a technical term, defined as two consecutive quarters of decline in gross domestic product. The National Bureau of Economic Research is the authority that declares recessions in the US, and its own definition is “significant decline in economic activity that spreads throughout the economy and lasts more than a few months.”
Each person will feel the effects of the recession differently, depending on their circumstances, jobs and places.
“A lot of people have been through a lot of real recessions without really feeling their impact,” said Colin Moynahan, a financial advisor at Twenty Fifty Capital in Charleston, South Carolina.
In other words, panicking about the possibility of a recession could backfire. But it pays to be prepared.
Even with the risk of recession in the air, the data shows that Americans continue to spend at a brisk pace. US consumer spending, adjusted for inflation, unexpectedly rose in March. And the nation’s largest banks recently reported that credit card spending increased in the first quarter.
Advisers say it might be time to cut back on some of those spending. It is part of a financial strategy that effectively follows the old adage of “making hay while the sun shines”.
“The hardest part is proactively changing behavior to get ahead of the situation, rather than trying to catch up,” says Moynahan.
That may mean looking for ways to cut discretionary spending or identifying purchases that are priorities rather than wants. Holidays and meals out are often some of the first areas to cut back, said.
Prepare your portfolio
In a recessionary environment, the classic 60/40 portfolio—60% stocks and 40% bonds—is supposed to shine. This is because recessions typically trigger rate cuts, which are good for bond prices. That’s not the case this time as rising rates have sent bonds crashing, said Christopher Grisanti, chief equity strategist at MAI Capital Management.
“The 40-year-old part, which is supposed to protect you, has done just as badly as the 60-year-old part,” said.
Grisanti is in favor of tilting portfolios more towards equities at the moment, as it tends to do well in an inflationary environment. But he advises against taking too much risk. Those who insist on stock picking should be sure to pick companies that have already posted earnings, he said, because “the market hasn’t forgiven dips.”
real estate circulation
One of the main objectives of the Fed when raising interest rates is to cool down the housing market, which has skyrocketed since the pandemic began. In February, the last month for which data is available, a measure of prices in 20 US cities rose 20.2% from a year earlier.
Does it make sense to buy a home with the risk of a looming recession? Buying now could mean locking in mortgage rates before they go even higher. But it could also mean borrowing for an asset when prices are high, only to see its value fall in the coming months.
Everyone’s situation is different, but advisers often say that buying a home you can afford and plan to stay in long-term might make sense even if there’s a recession ahead. Buying a house that you plan to keep for only a few years might not be.
Twenty Fifty Capital’s Moynahan says someone buying a house to live in for a period of about five years would need that property to appreciate quite a bit to recoup closing costs and make a profit. That would be even more difficult if a recession hits in the next few months and housing demand declines.
Should you resign?
At this point in the Great Resignation, many people have already left jobs they can’t stand. Those who fear a recession in the coming months may worry that leaving their duties now could leave them exposed to a slumping job market, unable to be easily rehired. Advisers say those fears are overblown.
“We don’t see that the employment situation has relaxed,” says Grisanti. “It’s the best time in a generation to be employed.”
In March, US employers posted a record level of job openings, with 1.9 jobs available for every unemployed worker. At the same time, wages and salaries increased 4.7% in the first quarter.
However, not all sectors will respond in the same way to a slowdown, said Matt Miskin, co-head of investment strategies at John Hancock Investment Management. Consumption-focused sectors like retail and hospitality could be riskier in terms of job stability.
“If the company is closely linked to the economy, I would think very well before taking that leap,” he says. “Even if they tell you that you have the job right now, they could cut the workforce next year.”