Is a Recession in the Cards? Written and prepared by: Robert Janson, CIMA®, AIF® Senior Vice President, Senior Portfolio Manager, Wealth Services
of these. The recent decline for the S&P 500 Index was 13%. Small caps (Russell 2000) were down 21% while mid-caps (S&P 400) were down 25%. The market was already in correction mode due to rising interest rates before Russia invaded Ukraine. The slowing economy and the turmoil surrounding inflation make the Federal Reserve’s job very difficult. The stock and bond markets have already priced in much of this uncertainty. The best action for investors in the current markets is to maintain a long-term perspective and take advantage of opportunities by rebalancing or redeploying investments while prices are lower. In our bond portfolios, Alera Group Wealth Services in October of 2020, and again, in November of 2021, reduced the duration of our bond strategy to lower the interest rate risk while maintaining diversification. We also increased the exposure to inflation protected bonds. This allows our portfolios to continue to reduce the downside risk of rising interest rates, while reinvesting in higher yields as shorter-term bonds mature. In our equity strategy, we have recently tilted our equity portfolios toward value stocks, which typically
include less economically sensitive sectors such as consumer staples, are more reasonably priced and typically better positioned to sustain earnings growth in a slower economy. We still maintain exposure to companies with strong fundamentals that can produce consistent earnings and dividends, as well as those bringing innovation and market share dominance in a slower growing economy. Talk to your advisor if you have any questions.
Prior to the Russian invasion of Ukraine, the US economy was already slowing after the rapid growth of the post-Covid recovery period. Now, the Federal Reserve is balancing competing objectives of wrestling inflation while maintaining economic growth, made all the more perilous by chaos in the oil markets. With all of the economic cross currents and uncertainty, the possibility of a recession has grown. In the simplest terms, a recession is generally defined by experiencing at least two consecutive quarters of falling GDP. The recession caused by the Covid-19 shutdown in 2020 broke this “rule” by only lasting two months. The GDP growth for the current quarter is expected to still be positive but much slower than the previous quarters since the recovery began. Keep in mind that the economy’s ability to withstand higher prices and some job reshuffling is better now given that the job market is still very strong and personal and corporate finances are much healthier than they have been in recent memory. Historically, the stock market has had three types of downturns associated with recessions. Not every recession has caused a major market downturn like we saw in the 1930’s Depression, 1973-1974 Arab Oil Embargo and the 2008- 2009 Great Recession. Those three recessions/ depressions caused the stock market to fall by 50% or more. Some may wonder if the current Russian oil sanctions and rising oil prices are an echo of the Arab Oil Embargo. The simple answer
is that we are far more energy independent than we were in the 1970’s and are finding other sources for the energy provided by Russia. Not every recession leads to a complete disaster in the stock market. There have been a number of times throughout history where the United States went into a recession but did not experience a debilitating market crash. There were five recessions when the market dropped by at least 20% into bear market territory. The market was already in correction mode due to rising interest rates before Russia invaded Ukraine. In 1948, 1957-1958, 1960-1961, 1969-1970 and 1981-1982. The average drop was 27% and the average length of the recession was about 11 months. There were four recessions that did not cause the stock market to drop into bear market territory – 1945, 1953-1954, 1980 and 1990. The average market drop was 16% and the average length of the recessions were about 8 months. Recessions aren’t great for the stock market, which is an obvious statement, but they don’t always signal the end of the world either. The current downturn is already worse than three
Interested in a market recap of Q1 2022? Register for our webinar on April 27 th at 11:00 am CDT.
Personal Finance Quarterly | Spring 2022
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