Episode: 07-26-2022 | Recession Facts & Investing Truths

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP® Dollars & Common Sense · Recession Facts & Investing Truths Allison Dubreuil, Wealthway Financial Advisors:    Good evening. I’m glad to have you back because I was saying, after I did the last show by myself, that I was really tired of hearing myself talk. […]

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Allison Dubreuil, Wealthway Financial Advisors:    Good evening. I’m glad to have you back because I was saying, after I did the last show by myself, that I was really tired of hearing myself talk. Tonight, we’re going to tackle one of the elephants in the room. We’re going to tackle “recession or no recession.” Are we or are we not in a recession? We’re having, of course, all the indicators of recession. We have inflation. We have rising interest rates and declining stock market. But does that necessarily equal a recession? And will there be one? How long will it last? We want to demystify some of the statistics around recessions so that it will give you a little bit of comfort.

Kevin Zywna, Wealthway Financial Advisors:    Right, so we like to talk about things head on, especially in times of turmoil. We, like you say, demystify them a little bit. Recessions are normal and natural, and part of the economic cycle. Ideally it would be great if we could avoid them, but we can’t. That’s the part of the capitalist system that we signed on for. That in the long run, raises all the boats and makes us all better off over time. But in the short run, short periods of time, in any given say, six to 12 month period, we can see the economy occasionally, contract, restrict, pull back. Where spending starts to be curtailed, reduced, and the money flow throughout the economy become somewhat less. Which means that profitability typically in companies starts to decline. Then we have a declining stock market and a potential recession. Which does have a relatively technical definition. We’ll get into that in a minute. But the reason people fear recession so much is because of what they can cause. The obvious things are lower home prices, lower stock prices, and almost always higher unemployment. Companies start to cut costs, restrict inventory, and lay off workers, to try to maintain profitability and stop the bleeding. Losing one’s job unexpectedly is typically one of the more negative events that can occur.

Allison Dubreuil, Wealthway Financial Advisors:    Right, that’s probably the biggest impact that individuals would feel – if they were to lose their jobs. So that’s why unemployment is such a key factor of a recession.

Kevin Zywna, Wealthway Financial Advisors:  I would say that opinions are mixed on whether we are in a recession or not. We’re not going to know officially, if we’re in a recession, or there was a recession until months after the fact. Some pundits will say that, yes, it feels like a recession. We haven’t seen the numbers yet, but I’m calling it. Others would say really you can’t. It’s hard to have a recession when unemployment rates are so low, when there are so many people still at work earning income. And the consumer is II thirds of the overall economy. If people are at work earning income, that means they’re usually spending money. It’s really hard to have a recession with a 3%, I think, unemployment level. I’d say opinions are mixed at this point. We’ll talk through some of the things you can do in a recession. The things that you can plan for in advance, and some things that (hopefully) you put your mind at ease.

Why Is It Called A Recession?

Allison Dubreuil, Wealthway Financial Advisors:  Let’s kick things off with a fun fact, though, before we delve into the details of recession.I think it’s interesting to have context around what these things are and what they mean in the real life implications. One question is, why is it called a recession?

Kevin Zywna, Wealthway Financial Advisors:  Because the economic bear is hibernating in the woods, and the economy is contracting. Tt’s recessing. It’s pulling back. Economic growth is pulling back. It’s not growing. It’s not positive.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, okay. I could buy that. By all accounts that I saw, it was just because saying depression is too scary of a word. And we’re too soft for scary words these days?

Kevin Zywna, Wealthway Financial Advisors:  There’s no technical economic definition of a bear market. But it’s widely to be believed to be a 20% decline from peak to trough in a market index. There’s no technical economic definition of a depression, other than it’s a recession that’s so severe, and so pervasive that it wears the crown of being the worst of all time. And we still see nothing in this country really surpass the depression of the early, late 20s, early 30s. In this country, even the housing crisis of 2007 2008, which was the next closest, we call a great recession instead of a depression.

How Is A Recession Defined?

Allison Dubreuil, Wealthway Financial Advisors:  See, depression is too scary. So what constitutes an official recession? The official definition of a recession is II quarters of consecutive GDP contraction. Where GDP is decreasing for II consecutive quarters. That’s declared by an organization called the National Bureau of Economic Research. They are the nonprofit that declares whether we are in a recession or not. But not in a timely manner, as you have said. Because it is more complicated than that. And II quarters of consecutive GDP contractions does not necessarily mean they’re willing to say yes, we’re in a recession. There are other indicators like domestic production, like employment, like we already talked about). Consumer sentiment is a another really big indicator. Right now the indicators are conflicting.

Kevin Zywna, Wealthway Financial Advisors:  They’re mixed. Yes. This data lags several months behind real time data. That’s why I’m saying that we won’t know that we’re in a recession, officially, until we look back in time. Until maybe the end of the year, December or January. Then they might say, “Oh, yes. July and August, were recessionary months, based on the contraction of GDP and other economic data.” There we have it. But by the time they announced that, almost always – the recession is over, and we are climbing back out of it. So if you’re waiting for a recession to be declared, it’s going to be too late to make any particular moves with your finances. It’s something that is just a normal part of a capitalist economic cycle that happens from time to time. On average, about every six or seven years. So we shouldn’t run from these types of things. We should plan and prepare for them because we know that they are occasionally inevitable. We are talking about recessions tonight. Are we in one? Are we not in one? Does it really matter?

How Long Do Recessions Last On Average?

Allison Dubreuil, Wealthway Financial Advisors:  I guess it depends. A recession is officially defined as II quarters, II consecutive quarters of decreasing GDP. But the organization that declares whether we’re in a recession or not actually looks at multiple factors. It’s not just GDP. It’s also employment, income, real income, inflation, and other indicators that all contribute to the conditions of a recession. If we’re looking at a recession, which we won’t know until hindsight, really. What does that mean? How long do recessions typically last? Well, if we’re looking at post World War II data, which is probably most relevant nowadays, recessions, lasts on average 11.1 months. A little bit less than a year is the average length of a recession. Of course, the Great Recession was a little bit longer than that at 18 months.

Kevin Zywna, Wealthway Financial Advisors:  Yes, and I think after World War II is important. There are now laws and regulations, and probably Federal Reserve sentiment to attack and try to defeat any sort of significant recession, which was not the case, pre-World War II. And certainly not the case for the Great Depression. A lot of the actions that the government took contributed to making that recession the worst in US history. In modern times, average recessions last about 11 months. I don’t think we’ve seen one even for that long that you said like the 2008-2009 housing crisis.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, so I think there’s an argument that maybe we had a short one in 2020. Right, February, March, April, but that would have been really short, owing to Coronavirus, right? COVID. So I think we did actually have contracting GDP, but the last serious recession was in 2007, 2008, 2009. Which means we’re overdue for a normal recession. Right?

Kevin Zywna, Wealthway Financial Advisors:  Yes, that’s right. So there were two months of economic contraction due to Coronavirus, which really doesn’t qualify as what we would consider a recession. Not long enough. But technically, GDP was negative during that time period. So if you want to call it that, it’d be the shortest recession in history. Right around Coronavirus in 2020. So how often do they happen?

How Often Do Recessions Occur?

Allison Dubreuil, Wealthway Financial Advisors:  Post World War II, we’ll just focus on those statistics. They happen about every four to five years. A recession occurs every four to five years. Now, if we want to say the last recession was the Great Recession, then that’s been almost 11 years since that time. So some would argue that we’re overdue for a recession. Which again, is a part of normal business cycle in a capitalist society. Now, what is the effect of a recession? I think that’s what people need to focus on. What does this mean for me?

What Is The Effect Of A Recession?

Kevin Zywna, Wealthway Financial Advisors:  Right? Yes. And like we said, early in the show, a recession is usually accompanied by rising interest rates, declining stock market, but most importantly, mass layoffs – job loss, as companies are seeing a revenue decline. They adapt by attempting to reduce expenses. One of the largest expenses for most companies are labor costs. So there’s not enough work for people, they get laid off, they lose their job. That’s typically the greatest fear of most people that I’m going to lose my job in the midst of a bad economic time. Which is going to make it even harder for me to find a new job at that point in time, right.

Allison Dubreuil, Wealthway Financial Advisors:  Now, by all indicators at this point, anyone who wants a job can find some sort of employment in this current economy.

Kevin Zywna, Wealthway Financial Advisors:  Right. That condition does not exist right now, today. Which I think argues against the fact that we are in a recession. Again, the data doesn’t come out for  months after the fact. But we probably are not because we are too close to full employment. We’re not even really seeing companies slow down on hiring that much. It’s hard to have a recession when you have basically full employment, people earning money. And the consumer being 2/3rds of the economy, still spending money out there. It’s highly unlikely if it occurs, it’s probably going to be a blip.

What Can You Do To Prepare For A Recession?

Allison Dubreuil, Wealthway Financial Advisors:  What can you do specifically, if you are worried about losing your job? Well, this is something we say pretty often, but I think it just bears repeating over and over again. You need to have your emergency fund. That is your frontline defense against unexpected job loss or any other unexpected financial issues. Having at least three to six months’ worth of living expenses set aside in a bank. Boring old bank, probably not earning anything right now is your safety net. And if your job is less stable or less secure, then maybe you have more than three to six months, maybe you have six to 12 months set aside. Ideally so that you can bridge a gap in employment if something happens.

Kevin Zywna, Wealthway Financial Advisors:  Right, the average person should treat recessions like the average financial advisor, financial planner should treat bear markets. They are inevitable. We know they are going to happen. We know on average when they are going to happen. But we don’t know, no one knows precisely, when they’re going to happen, how long they’re going to last or how deep they’re going to go. Prepare yourself for those eventualities. Prepare yourself for the fact that there are going to be recessions. You do that with a solid emergency fund and low debt service.

When we do our planning for our clients, we build in the fact that there are going to be times just such as this. There are going to be declines in the US stock market of at least 20%. We factor that into our planning so that when they occur, we aren’t surprised. We don’t panic. We are prepared. We go to our contingency plan. An individual would draw down their emergency fund. In our clients’ case, we might reduce how much is coming out of their portfolio and purposely draw down on their bank account.

Your lifestyle is protected even in one of the biggest calamities that typically happen throughout an economic lifecycle. It’s those who don’t plan and don’t prepare that bear the brunt of these situations the most. It all comes back to financial planning. The more you can do it, the better you’re going to be.

Allison Dubreuil, Wealthway Financial Advisors:  Tonight we’ve been talking about recessions, what is a recession? More importantly, what should you do about it? We’ve discussed that recessions occur about every five years. So it is a normal occurrence, a normal part of the business cycle that we should plan proactively for personally in our personal financial lives. Recessions lasts just a little bit less than a year, typically on average, 11 months. And what you can do to prepare yourself for recession? First and foremost is make sure you have your financial ducks in a row by having adequate cash reserves for emergencies and staying away from bad consumer debt. That’s really a good rule of thumb, regardless of a recession is to follow that advice. You’ll be well ahead of many people if you can just accomplish those two financial goals. But we can take this a step further and talk about investing. So how the stock market is I guess affected by a recession or how you can use your investments during a recession?

How Can You Use Your Investments During A Recession?

Kevin Zywna, Wealthway Financial Advisors:  Yes, so a bear market typically accompanies a recession. Because as the economic activity becomes depressed or recessed or retrenches, then so does corporate profitability. Corporate profitability is the main driver of stock market performance and so usually the two go hand in hand. However, they don’t match up or don’t sync up in the same timeframe. Stock market is a forward looking vehicle people anticipate a recession before it actually happens. Which typically leads to the bear market or significant downturn in the market months before an actual recession. The converse is also true. On the other side, before the recession is even actually over. Typically, you will start to see the stock market start to recover with about the same speed and velocity as it went down. All in all, what we say is always invest, but don’t try to time these things. You can’t do it. We can’t do it. No one can do it successfully. Blind pick and find an acorn once in a while. Anyone can get lucky. But more money is typically lost trying to avoid the bear market, than is actually lost in the bear market. The short term volatility of the stock market is the price that investors must pay to enjoy the long term higher rates of return that we get out of equities than we can find in most other investment vehicles.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, the market is a leading indicator. But it doesn’t necessarily mean just because we’re in a bear market does not mean we’re going into a recession.

Kevin Zywna, Wealthway Financial Advisors:  Right. The Stock Market can be wrong. It’s been wrong a lot of times in the past expecting a recession that never materialized. And don’t you look silly, then selling out at the bottom?

Allison Dubreuil, Wealthway Financial Advisors:  Yes, I mean, I hope that there’s just one takeaway from tonight. And you know, a lot of our discussions is that timing the market is impossible for anyone to do consistently. You can certainly get lucky. But if you’re trying to time the market, you have to time it perfectly  – twice. You have to get out at the right time and get in at the right time. And that is one of the scariest decisions. Most people end up paralyzed on the sidelines for years.

Kevin Zywna, Wealthway Financial Advisors:  Right. Think about what this actually means. If you’re so afraid of the fact that you see the value of your portfolio declining that you sell all your investments and move to cash, because of the calamity that you feel the economy is going through. Well, in order for that strategy to work, you have to wait for the stock market to go even lower, which means the world around you feels even worse that the news that’s coming. That the headlines that are being printed that the news is coming out of the TV that you see on your phone or on the website, it’s got to be even worse. If you didn’t have the courage to stay in, in the first place, how are you going to summon the courage to buy in, when the stock market’s lower? When the world feels like it’s burning down even faster? It defies human nature. Yes, right. So you can’t do it, we can’t do it. No one can time the market successfully. More money is lost trying to avoid the downturn than is actually lost in the downturn. You need a cohesive comprehensive investment plan strategy that you stick to through thick and thin. That’s how you grow your net worth fastest. And that’s how you become financially secure.

Allison Dubreuil, Wealthway Financial Advisors: I think that’s just one of the fundamental truths or rules of investing. Long term market returns are going to include periods of downturn and turmoil. But if you look at the statistics, there are many more positive years than negative years. There are many more positive months than negative months. There are many more positive days than negative days. The odds are in your favor.

A lot of times we talk with people who liken investing to gambling. Well, when you’re gambling, the odds are against you, the odds are in the house’s favor. When you’re investing for long term, most people have a long time horizon. In our mind, your time horizon is your lifetime, if you’re an investor. If you’re investing for the long term, the odds are statistically in your favor. You will have more money in the long term than then if you had not invested. These are the temporary setbacks. That’s the price you pay to be compensated over the long run.

What Is A Bear Market?

Kevin Zywna, Wealthway Financial Advisors:  Bill in Williamsburg, you’re on Dollars & Common Sense. Good evening.

Caller:  I want to say one thing, you mentioned a bear market. Is that a good market or is that a bad market – a bear market? I’m not sure what that is.

Kevin Zywna, Wealthway Financial Advisors:  A bear market is considered to be a decline of at least 20% from peak to trough in a major market index. It’s a good thing if you are a net accumulator. If you’re still contributing to your company retirement plan, and moving money into your investments and portfolio, then it can be a positive.

Caller: Okay, so you say a bear market can be good. Is that what you’re saying?

Kevin Zywna, Wealthway Financial Advisors:  It could be, depending on your situation.

Caller:  A recession, that’s saying that’s around the world – that’s not just America?

Kevin Zywna, Wealthway Financial Advisors:  Bill, are you suggesting there’s a worldwide recession?

Caller:  Yes, that’s what they were saying. They’re saying, don’t blame that one of the people that are talking about the economy, don’t blame it on them. We’re in a recession, because that’s all over the world. The whole kind of problems that are happening in our economy are around the world. So if that’s happening all around the world, what is that? What does that mean? It’s not just saying that our country is, they’re saying all around the world is what I thought I heard on the news on this weekend.

Kevin Zywna, Wealthway Financial Advisors:  Yes, well, I would dispute that. It’s virtually impossible to get a coordinated worldwide recession. There are so many different countries, so many different economies, made up of so many different industries.

Caller:  It’s a worldwide food shortage all around the world. They’re taught that there are people around the world that aren’t getting along. And you got weather. Tthey’re blaming everything on the weather. So by the time you get done with the pandemic, and everything else, everything’s all over the world. It’s not like just America.

Kevin Zywna, Wealthway Financial Advisors:  Yes. It’s a fair point. There’s always negative news. There’s always a calamity somewhere. We generally, in our practice, and on the show, talk about the US because it’s the world’s largest economy, and it affects most people. But we call it the crisis of the day. There is always a crisis of the day. There is never not a crisis of the day. And there’s always a reason to be scared out of investing. The short term volatility of it causes people to not trust or not believe the long term prospects. It’s always out there. It never goes away. It never will go away.

But despite these calamities, these four crises, yes, negative forecasts, guess what? The stock market, American ingenuity, American companies all overcome (and international as well, but let’s just kind of keep it to the US). That’s what capitalism does – it adapts. It overcomes and it strengthens as time goes along. To bet against it is folly. You can’t make a logical argument that says that the probability is we will be worse off as a society from an economic perspective 20 years into the future. It’s almost unheard of. I don’t think it’s ever occurred. Look back 50 years ago, 75 years, 100. Look at how smartphones, the technology…

WNIS:  Well, if I can say this, I watched something earlier and I believe it to be true. Somebody talked about the 50s 60s 70s 80s 90s 2000s in every 10 years. There’s a group of people saying in 10 years, the world’s going to end in the 80s it was because the acid rain was going to ruin the crops in the 90s it was the ozone. In the 2000s it was terrorism. It was all these things that are going on in 10 years.

Kevin Zywna, Wealthway Financial Advisors:  The world’s going to always on the brink of destruction.

Allison Dubreuil, Wealthway Financial Advisors:  This was interesting this stuck with me I read this story about (I don’t know the time period, but when there were horses and buggies in New York City) and the crises was that in 10 years the whole city was going to be buried in horse manure. And the world was going to end. And it surprisingly didn’t happen. They came up with the solution for the manure.

WNIS:  That’s a good argument for global warming. They don’t factor in what innovation is going to happen that will then propel it to go the opposite direction.

Allison Dubreuil, Wealthway Financial Advisors:  You can’t even comprehend. We’re not there yet. Right?

Kevin Zywna, Wealthway Financial Advisors:  Yes. Yes. Human ingenuity is the greatest driver of human progress. It’s constantly evolving, constantly inventing and reinventing. Not in a straight line. No, I know, it’s two steps forward one step back. Not for every country. Maybe not at the same pace. Not for every culture, necessarily. But on the whole, en masse, all of the world’s population is better off today than at any other time in human history. Certainly, you can find individual pockets of exceptions there, but en masse, across the globe, we’ve never been better off than we are today. And that is going to be true 10 years from now. That we are going to be better off 10 years from now than we are today.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, there’s an interesting organization or website (I think there’s a book out there, too). It’s called human progress, www.humanprogress.org. And it’s all about that. These statistics about innovation and growth and how we are progressing. None of which makes the news. You have to actually go seek out the good news of what’s being done around the world, right?

Kevin Zywna, Wealthway Financial Advisors:  That’s not how the news cycle works. The news industry somewhat works against the investor by promoting bad news over good news. Everything seems worse than it is. Situations more dire.

Recession Facts & Investing Truths Wrap-Up

Kevin Zywna, Wealthway Financial Advisors:  I think the lesson here is, recessions are an inevitable part of the natural cycle of economic cycle of capitalism. They aren’t pleasant to endure. Are we in one right now? Just my personal opinion, I say no, because unemployment is too low. It seems highly unlikely. The stock market seems to be reflecting that thinking that it is. Well, guess what?

That’s a mismatch that’s that argues for a good time to buy. We definitely know that prices of your average mutual funds are a lot lower now than they were six months ago. So great time to increase. If you aren’t contributing to your company retirement plan, great time to start. If you are contributing, good time to increase, if you have excess cash sitting in your bank account above the amount for health emergency, it’d be a good time to add it to an investment portfolio. This is when the money gets made. The trite expression of investing, “buy low sell high.” It’s so easy, anyone can do it. This is what buying low feels like it never feels good to buy low buy into a recession buy into a bear market buy into a down bar. It doesn’t feel good, because all the news and all the headlines are saying don’t. Stop. Panic.You see it when you open your statements. Your quarterly statements are going down, down, down. That’s the time that the money gets made. When you either stick with the plan, or you continue to add more fuel to the plan, more money to the plan. Whn the eventual market recovery happens. That’s how you grow your net worth faster.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, and I think a point to tie into that concept is the fact that market volatility and risk are not the same thing. I think a lot of people in the finance industry talk about volatility as being the risk. But market volatility is not risk because market volatility is short term. That should not really matter. Like we just talked about, if you’re accumulating and you’re saving then this is a positive for you. And even our clients that are in retirement. You know we that’s what we do day in and day out. We help clients who are retired and who are drawing out of their nest egg manage these ups and downs. Because we know they’re going to happen. We plan for them. We have not had one single client that has had to make any adjustment to their lifestyle as a result of this market pullback.

Kevin Zywna, Wealthway Financial Advisors:  We know that because we integrate the investment management with the ongoing financial planning analysis. If the market were down far enough, or it went on long enough, then we would start to see that in our numbers. But because we integrate the financial planning with the investment management, that gives the clients the peace of mind based on our recommendation and analysis, that they’re okay. That they don’t have to change anything. That they don’t have to adapt their lifestyle. Most importantly, why we do this, that their lifestyle is protected, regardless of what the market is doing in the short run. Then they get to enjoy the higher long run rates of return that investing gives you.

Allison Dubreuil, Wealthway Financial Advisors:  And that’s why we feel so strongly that investment management needs to be done in concert with comprehensive financial planning. That just investment management, that’s what people think they need, they just need to know how to invest their money. That’s just going to give you a rate of return that does not tell you what to do in times like this. Or how much you can spend. Or if you can still retire in a time like this.

Kevin Zywna, Wealthway Financial Advisors:  It doesn’t answer any of life’s big financial questions. All you get from investment management is a rate of return. Okay, now, what are you going to do? Can you still retire on time? How much can you spend when you’re in retirement without fear of running out of money? Do you need to reduce how much you’re withdrawing from your portfolio? Do you need to increase how much you’re putting into your portfolio? Those life’s big financial questions that get answered through ongoing analytical financial planning.

Allison Dubreuil, Wealthway Financial Advisors:  I would just add, if you’re working with a financial advisor, hopefully you’re getting the full value of financial planning services and not just investment management. Because there are, I think, firms that just do investment management. And firms that also integrate financial planning. Everyone can benefit from financial planning. Everyone at any point in their life can benefit from general financial planning advice.

Kevin Zywna, Wealthway Financial Advisors:  Financial planning is the service that everybody needs that they don’t know they need.

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