Has the recession started? When will it end?
Most questions I am getting these days revolve around the idea of whether or not we are in a recession. Rising interest rates, lower GDP, and corporate earnings all point to recessionary times, but it is difficult to know when we enter or when we are done.
Here are my thoughts.
To my knowledge, we have never entered a technical recession BEFORE interest rates stopped hiking. The cadence normally is as follows:
- Economy overheats and inflation becomes an issue.
- The Federal Reserve hikes interest rates, consolidating M2 (a measurement of the nation’s money supply that estimates all of the cash that everyone has in hand or in short-term bank deposits)
- Unemployment rises due to less money in the system
- Recession
In this case, due to the massive stimulus from COVID-19 shutdowns and the government overreach, there is more money in the system than ever before, resulting in the fastest growth we have ever seen.
For reference, M2 (as measured by non-government bank deposits – IRAs) in March 1960 was $299 billion, as compared to today, M2 is almost $21 trillion. This is an approximate annual growth of 6.96%. However, M2 grew by an annual rate of 18.16% from February 2020 to February 2022. For home gamers, that’s 300% more growth in two years. In other words, the Federal Reserve took 12 years of monetary growth and jammed it into two years, including two recessions. This was the federal government’s answer to COVID-19 shutdowns.
So, this is to say it might take a little pain before it is said and done. Interest rates have risen so rapidly that it put the regional banking business on the precipice of extinction and caused three of the four largest bank failures EVER this year. The bond market in 2022 was the worst it’s ever been in the history of bond markets in terms of return. War, civil riots, elections, China’s re-opening, and reimagining the supply chain out of China, all play into the idea of wondering when a recession will hit and how long will it last. A question designed for forward-looking conclusions about getting life back in order and restarting the growth machine we are so accustomed to from the last 10 years.
The answer to that is that simply, life has changed. I do not expect the same growth engines of the massive bull run from 2009-2020. Nor do I expect no inflation and zero interest rates to come back anytime soon. However, I do expect the market to parse out good and bad businesses, especially in the technology sector where easy money and million-dollar bonuses were handed out to Stanford graduates in Silicon Valley, just for a title. Those days may be long gone.
I expect to go back to normal. Secular growth markets, bond yield that will actually yield some income, and knowing what you own will be more important than owning everything.
In the absence of runaway growth that everyone will soon realize, tax planning, strategic investment decisions, and unemotional investment planning will be more important than in the last 20 years, and maybe ever. If we include the estate planning tax rules that sunset in 2026, this may be the most important time to have a sound financial plan incorporating investments, tax, and estate planning.
If I were to predict what will happen next, my best guess is that the Fed ends rate hikes in May 2023. We will enter a recession in late 2023 or early 2024, and the Fed lowers short-term rates to target 3.5% to combat the recession. M2 ends up around $20.14 trillion in the first quarter of next year, assuming reversion to the mean of 6.86% growth from the starting point of $15.450 trillion in February 2020, which really isn’t all that far away from where we are now at $20.818 trillion.
Despite my early education and my original plan to work for the Federal Reserve after studying economics, please remember that I am not a professional economist. I am a wealth planner and portfolio manager. So here are some key points I am advising to my clients, considering all this information.
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- Know what you own and be targeted in your investment plan. Traditionally, the best sectors in recessionary periods are:
• Utilities
• Healthcare
• Consumer Staples
• Real Estate – BE CAREFUL HERE
• Bonds
- Be properly insured, especially if you have a taxable estate or a family. In recessions, people tend to feel dejected and fall into hard times, causing mortality rates to increase. Make sure to protect yourself and your family.
- Do not day trade your accounts or deviate from a well-thought-out plan.
- Growth-oriented clients – Think about what you want to own in five years and start buying now.
A few things I am currently watching:
- Federal Reserve notes after raises
- AAPL and Microsoft earnings
- Transports
- NHL Playoffs
As always, I am available to answer any questions or be a resource to you and your family or friends. Please do not hesitate to call or email me. Happy Mother’s Day!
Philip Clark, CPWA®, CFP®, CLU®| Director/Portfolio Manager – Wealth Management
Direct: 626.788.3947 | philip.clark@krostwealth.com
This information should not be construed as tax advice, nor should be taken as financial planning advice. Please consult your tax professional. These opinions are based on observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 05/10/2023 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.
Sources:
https://fred.stlouisfed.org/series/M2SL
https://www.bis.org/publ/work910.pdf