It is not easy to be an investor or an economist these days! The stock and the bond markets have mightily struggled during the first six months of 2022. Almost all of us feel the impact of high inflation when we go the grocery store, buy gas for our cars, or do just about anything.
To top it off, there have been regular media stories over the past few months suggesting that a recession has begun or if not, one will start very soon. These matters are important for everyone, but especially mid-life professionals navigating career change, planning for retirement now (or in the next few years), or have already left the work force.
It seems like we are living in a time of maximum pessimism, and it is natural to focus on the legitimate economic challenges that lay ahead. But the beginning of summer makes me think that the negativity is drowning out other facts we should consider as we think about how to respond to these undoubtedly difficult conditions. It is important to maintain perspective and evaluate all the available information before taking action!
The recent media speculation about whether we are in a recession, or on the brink of starting one is an important example of how looking at the facts is important. When we hear the word recession, it is natural to think about economic downturns such as what we experienced during 2008-09 and during the bursting of the technology bubble in the early 2000s.
While there is always the possibility that such dramatic downturns may occur, it is far from clear that such an outcome is likely or that you would be well served attempting to forecast such events. The current debate about the state of the economy is an example of why I think making such prognostications may be counterproductive.
Some economists and forecasters argue we are in a downturn because 1Q 2022 Gross Domestic Product (“GDP”) declined and because preliminary estimates for the second quarter show another period of a potential decline. However, while important, GDP is just one measure of the economy and relying on a single indicator may be misleading.
In reality, the US Bureau of Economic Research, the organization which publishes the beginning and ending dates of recessions, uses a variety of economic statistics, not just GDP, to make their determination.
Ultimately, we will see what they have to say when they make a recession pronouncement at some unknown future time. But in my opinion, it is certainly not an 
“open and shut case” that a recession is here or is imminent.
For example, there are important economic data points which show the economy is strong. “Real” (adjusted for inflation) personal income and real consumer spending remain at record highs. The job market remains strong, and companies are continuing to hire new workers. Job losses are also at historically low levels. Manufacturing production has continued to show robust growth during 2022.
I offer these facts to suggest that there is data to support BOTH sides of the recession argument, and those who are so certain that a recession is here are offering an opinion that represents a guess about something about which there is great uncertainty.
And instead of making such guesses, I think most of us should instead maintain humility when analyzing complex systems such as the US economy or the financial markets.
The belief that one of us truly knows what may occur may potentially result in regrettable decisions. Normally, correctly forecasting a recession may give an investor an edge. You might have the chance to re-position your portfolio before the event occurs and spare yourself the pain of a significant market decline.
However, a bear market in both stocks and bonds is well underway in 2022. The S&P 500 Index, a broad measure of the US stock market, declined 19.96% during the first six months of the year, making it the worst start since 1970. The Bloomberg US Aggregate Index, a similar measure of the US Bond market, declined 10.35% during that same period, also the worst start in decades.
Therefore, it is certainly possible that the financial markets may have already anticipated the possibility of a downturn. Why? Markets are usually “forward looking”, meaning that investors collectively try to price securities today based on what they expect to happen in the future. As a result, today’s debate about a recession may not as useful as some may believe.
That does not eliminate the possibility that there may not be more downside ahead or that the market has priced in all future risks or events. The US Federal Reserve Bank is increasing interest rates to attempt to control inflation. Market participants think they may succeed in doing so, but they also recognize that The Fed could unintentionally create a recession, possibly in 2023 or in 2024.
What should you do in the face of these uncertainties? Although it may be unwise to take dramatic actions based on an opinion about what the future may bring, that does not mean you should do nothing and hope for the best. My next blog will cover the important subject of financial decision-making during these times. Until then, please contact me if you have any questions about your situation or other financial matters.
