Recession Warning: Are you Ready?
Financial markets continued their decline in the second quarter, as both stocks and bonds remained volatile. The S&P 500 (equities) realized its worst first-half performance since 1970 (-20.0%) and the Bloomberg Barclays Aggregate Bond Index (fixed income) had its worst start to a year ever (-10.3%)!
Investors are still presented with many challenges:
- Still-high inflation
- Sharp increases in interest rates – the Fed has raised rates +2.5% this year
- Supply chain disruptions
- Ongoing geopolitical uncertainty – namely between Ukraine and Russia
- Rising probability of a recession (a risk that has become increasingly worrisome in investors’ eyes)
How did we get here?
As inflation ramped up in 2021, the Federal Reserve largely ignored the data, called inflation “transitory,” and allowed the economy to get overheated. When they were finally ready to go to war against inflation, the Fed kicked its monetary policy into overdrive, raising rates at every meeting since March of this year. While this is the most common way to fight rising prices, we believe that this strategy was started too late. The goal of this policy is to slow growth, and while the Fed believes they can conduct a “soft landing”, two straight quarters of negative GDP growth have investors worried that that is no longer in the cards and a recession is imminent.
How close are we to a recession?
While the “technical” definition for a recession is two consecutive quarters of negative GDP growth, it is not the only method of measuring a true recession. Official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data—including the labor market, consumer and business spending, incomes, and industrial production:
- Labor Market – The unemployment rate has remained stable, while overall employment continues to rise. However, the number of job openings did decrease in June.
- Consumer Spending – The consumer is seemingly still strong as personal consumption expenditures have yet to fall this year.
- Incomes – Both personal income and disposable income have gone up every month this year (through June) as wages continue to push higher.
- Industrial Production – The industrial production index did decrease in June for the first time in 2022, mostly caused by the slowdown in durable and nondurable goods production
In all, there is some weakening in certain economic data points, but there are also indicators (especially those related to the consumer) that point towards an economy that has yet to reach its absolute peak.
Probability of a recession is rising
We remain cautious as the Federal Reserve continues to hike interest rates into a slowing economy. As the impact of these hikes is gradually realized, we expect corporate earnings to fall and for unemployment to rise. History suggests the probability of the Fed tipping the economy into recession is high. The question is shifting from are we headed into a recession to what type of recession are we going to experience? Will it be a shallow, short recession or could the Fed put the economy into a deeper, more protracted recession? With inflationary pressures remaining “sticky,” the Fed will likely need to pursue additional rate increases to curb demand. Therefore, we believe market volatility will remain high and a more defensive posture may be warranted given the challenging macro-economic conditions.
How Can We Help?
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about your portfolio as volatility is expected to persist for the months ahead, please contact us today!