Are we headed for a recession? Lately, it seems we hear about it daily. There is concern that we are approaching a recession or even in the early stages. Can it be avoided? What does it mean to be in a recession, and how does it relate to the current markets?
To put market and recessionary concerns in perspective, it might help to describe six ways a recession resembles a bad mood. It is surprising how similar they are!
1. There Is No Exact Definition.
We all know what a bad mood feels like, although there is no clear definition for the mix of emotions it comprises.
Similarly, there is no single identifier to pinpoint exactly when a recession is underway or when it’s over. Instead, recessions can trigger or be triggered by various conditions connected in many fashions and degrees. These usually include a declining Gross Domestic Product (GDP), rising unemployment, sinking consumer confidence, gloomy retail forecasts, disappointing corporate balance sheets, a bond yield curve inversion, stock market declines, and similar combinations of objective and subjective events.
In the U.S., the National Bureau of Economic Research (NBER) defines a recession as follows:
“A recession is a significant decline in economic activity that is spread across the economy and that lasts for more than a few months.”
Rather vague, right? Similarly, the World Bank Group has stated, “Despite the interest in global recessions, the term does not have a widely accepted definition.”
2. You Can Spot One in Hindsight.
How do you know when you’re in a bad mood? Often, you don’t ― until you’re looking back at it.
Recessions are similar. Since a widespread downturn must linger for a while before it even qualifies as a recession, the NBER only declares one after it’s underway. For example, in July 2020, the NBER announced we’d been in a recession for two months between February–April 2020. Triggered, of course, by the abrupt arrival of the global pandemic. It was the shortest recession in the U.S. to date and already over by the time we even recognized it.
3. Sometimes, We Get Stuck for a While.
Hopefully, your bad moods come and go, with more good times than bad. But sometimes, one misfortune feeds another until you feel gridlocked. It may take a while before your attitude changes, and you can move beyond your mood.
Sometimes, recessions can become a self-fulfilling prophecy. As Nobel Laureate and Yale economist Robert Shiller describes, “The fear can lead to the actuality,” in which economic conditions might feed inflation, which inverts the bond yield curve, which signals a recession, which shakes corporate and consumer confidence, which leads to unfortunate reactions that further aggravate the challenges. When this occurs, a recession and its related financial fallout may last longer than the underlying economics alone.
4. They’re Inevitable.
It’s never fun to be in a bad mood, but we can all agree they’re part of life. It would be unrealistic to think we can be happy 100 percent of the time.
While no one celebrates a recession, it helps to recognize that they aren’t abnormal. They are part of natural economic cycles. And while recessions can be challenging, they can sometimes help rein in runaway spending, earning, and pricing for companies, consumers, and creditors.
We may enter a recession due to interest rate increases aimed at warding off rising inflation amidst lingering COVID-19 supply issues and global economic sanctions against Russia. If we can avoid a recession, all the better. But if it takes a modest one to reduce inflation, it may be preferred.
5. Experience Helps.
When we’re young, we lack the perspective to know we won’t be miserable forever just because we’re unhappy in the moment. As we mature, we learn to temper our moods and seek support if we do get stuck in a rut.
The same can be said about recessions and similar challenges. It’s been more than a decade since the Great Recession and more than 40 years since the U.S. last experienced steep inflation. Many investors have had little first-hand experience managing such turbulent times.
It may help to acknowledge that we’ve been here before. While commenting on the most recent two-month recession in 2020, “A Wealth of Common Sense” blogger Ben Carlson lists nearly three dozen distinct U.S. recessions dating back to the 1850s, with an average length of 17 months ― some considerably longer. We endured a series of years-long recessions during the era of the Civil War in the mid-to-late-1800s. Then there was the Great Depression from 1929–1939.
It also helps to remember that every recession has eventually ended, with economies and markets thriving after that. As Dimensional Fund Advisors shows us, one-, three- and five-year average cumulative returns after significant U.S. stock market declines dating back to July 1926 have all been positive, rewarding investors who placed their faith in future expected returns. Since the underlying growth in global commerce ultimately drives markets, we can expect similar aggregate performance moving forward in domestic and international markets alike.
Consider these words of wisdom from one of the most experienced investors of all, Warren Buffett, in his 2012 Berkshire Hathaway shareholders letter:
“Periodic setbacks will occur, yes, but investors and [business] managers are in a game that is heavily stacked in their favor. Since the basic game is so favorable, Charlie [Munger] and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”
6. You Can’t Change Others, But You Can Change Yourself.
When you’re in a funk, it doesn’t matter whether it’s due to one thing, many things, or nothing at all. There’s ultimately only one person who can change your mood: you.
The same is true for your response to recessions, bear markets, and other external events standing between you and your financial wellbeing. Life is filled with many events over which we have no control, especially concerning our investments. And yet, you can take many small actions to contribute to the positive outcomes you wish to see in your home, the nation, and the world. You can manage our household budgets, show up for work (or perhaps volunteer in retirement), and be a loving family member, engaged citizen, and generous donor to the causes you hold dear.
And you can invest wisely, taking charge of your wealth by focusing on the things you can control and ignoring the forces you can’t. For example:
- We can’t avoid recessions. But you can channel our inner Warren Buffett to look past today’s risks and retain an appropriate amount of market exposure in pursuit of long-term financial goals.
- We can’t avoid bear markets. But you can avoid generating unnecessary losses by panicking and selling low in the middle of one.
- We can’t avoid inflation. But you can establish a thoughtful budget to track your income and spending, with a plan in place for adjusting as warranted.
Last and hardly least: It’s very hard to change the world. But you can always change yourself. Sometimes all it takes is a shift in attitude to seize your next best move. As always, we’re here to assist with that in any way. How can we be of service to you and your family? Don’t hesitate to be in touch.
Eric Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management, a financial advisory firm providing financial counsel and fiduciary investment services to individuals, families, and private foundations throughout the Traverse City and Northern Michigan region. He is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor™ with 25 years of experience. He also has a bachelor’s degree in finance from Hillsdale College. Braund is passionate about offering services rooted in hard facts and sound reasoning combined with meaningful, long-term relationships so that his clients can experience less stress and have more time and energy to invest in what they love.
Braund is a Northern Michigan native who truly enjoys all that the area offers, including hiking, biking, swimming, skiing, volleyball, and boating. He loves spending time with his family — his wife, Jodi, and his two children — and maintaining a balanced life. To learn more about Eric Braund, connect with him on LinkedIn.
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