It has been said that nothing is certain except death and taxes. Perhaps we should add recessions to the list as well. If history is our guide, then it is not a matter of if, but when the next recession will begin. But is this something to fear, or is it something to accept as a normal part of our economic cycle?
A History Lesson
When we think of recessions, we tend to think of the Great Depression of the 1930’s and the Financial Crisis of 2008. They stand out because of their severity, duration and impact, but we often forget other recessions that have been less severe and with shorter durations. According to a quick search of Wikipedia, there were actually 12 recessions in between the Great Depression and the Financial Crisis. Even if you lived through many of them like I have, most were forgettable because they averaged less than 1 year with unemployment that typically stayed in the single digits. Also, many of these recessions were followed by a period of prosperity and growth which further blurred our recollection and lessened the long-term impact. And perhaps most importantly, we have forgotten a lot of this because we haven’t had one of these less impactful recessions in quite some time now.
We may or may not be currently headed into a recession. There are contrasting forces at work and the outcome won’t be clear except in the rear-view mirror. Yes, there are a number of legitimate economic issues that are concerning right now including the war in Ukraine, inflation, rising interest rates, energy costs, and the looming threats of China and North Korea to name a few. At the same time, there are also a number of positive factors in our favor right now including historically low unemployment, strong consumer demand fueled by the reopening of the economy, and a Fed that is attempting to provide a soft landing for the economy. It is yet to be determined which forces will win out.
But perhaps whether a recession is coming is the wrong question to be focused on. There will always be a list of economic issues and geopolitical threats so we can’t wait for the list of risks to disappear before we decide to act as an investor. Both recessions and downturns in the market are inevitable, but if we also believe in the growth and market expansions which follow, then this will make it easier to stay invested and stay focused on our long-term financial goals.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.