Life Goes On
Dear Clients and Friends,
The American poet Robert Frost said, “In three words I can sum up everything I’ve learned about life. It goes on.” Those wise words have come to my mind many times over the years, but as I have been thinking of the quote lately it seems to sum up the challenges in the financial markets this year: they go on!
From our communications, or from seeing the news, you might know the main themes of the year so far. Stocks are down. Inflation is up. Bonds are down. Interest rates are up. The housing market is going down. There is war in Europe, supply chain challenges, Covid shutdowns in China, and on and on. And now, a new topic is starting to bubble up that you might be seeing in the news soon: the looming possibility of a recession.
Recessions, like many terms and concepts in the financial world (and poems for that matter!), are often more nuanced than they might appear at first glance. A recession is defined as "a significant decline in economic activity…” and whether or not a recession is occurring or did occur is determined by the National Bureau of Economic Research (NBER), often months after the fact. So, there is a chance that we are already experiencing a recession, but that determination might not be made for some time to come. If we have not yet entered a recession, many economists predict that a recession is likely sometime in the next 24 months.
However, it is important to put the term “recession” in context. A recession does not mean “game over” for the economy or the stock market. On average over the last 70 years or so, US recessions have lasted about 10 months and resulted in the economy contracting by about 2.5%. Of course, some are worse and some are milder, and knowing which one might be headed our way is impossible to correctly predict. As for impacts on stock markets, stocks usually fall before the economy enters a recession, and start to recover before the economy starts to improve, sometimes significantly before. It is important to remember that recessions are a normal part of the economic cycle, and that the long-term planning that we do with all of our clients anticipates and accounts for the inevitable ups and downs of the economy and the stock market.
It would be fair to wonder why a recession would be looming in front of us, given that we are still emerging from the first global pandemic in a century and it seemed like things were going to be getting better. Counterintuitively, the fact that things have been getting better is part of why a recession could be coming. As the global economy roared out of Covid lockdowns and economies started to return to normal, growth rates were high and many markets were doing great. So great, in fact, that inflation started to pick up, as suppliers and manufactures were charging more for materials and products and consumers flush with savings and stimulus were eager to buy goods and services, even at higher prices. All of this exuberance can spiral into out-of-control inflation, and in order to address that risk, central banks around the world have been raising interest rates to try to slow down inflation. Higher interest rates should also slow the economy, and that is exactly what we are seeing now.
In the US, the Federal Reserve is trying to navigate all this to achieve what they call a “soft landing.” Now they are hoping that by raising interest rates just enough, they will slow but not stall the economy and get inflation back under control. The challenge is in getting the rate changes and timing right, and historically their crystal ball has a less-than-perfect record. By most accounts they should have acted sooner to raise rates to combat inflation, and now they seem to be trying to catch up and make up for lost time. There is a real risk that the Fed raises rates too much or keeps them high for too long, even as inflation is falling, which could drive the economy into an unnecessary recession. There is also risk on the other side, that despite their best-efforts, inflation remains persistently higher than normal for years, and we end up with an extended period of low growth and high inflation. The Fed is aiming for their Goldilocks soft landing, but we as investors should not be holding our breath and betting that they get it right.
Instead, we should be focused on our long-term all-weather strategies that we have built together over the years. History has shown that no one has ever correctly and consistently predicted markets, interest rates, or inflation, and trying to time these things now would be particularly dangerous. Rather than guessing or making decisions based on headlines, we should focus on pairing our financial resources and goals with our comfort with investment risk to craft investment plans that can ride out the swings of the markets. Balanced and diversified strategies should cushion portfolios when things are going down while still allowing for long-term growth when things are going up, as they usually do. By making sure that our investment portfolios have the right mixture of stocks, bonds, cash, and other investments, we can hopefully feel confident that our money is working towards our goals, regardless of what the markets are doing in the short term.
The quote that I started this letter with is fairly famous, but I looked into the background and found the rest of the quote fascinating and appropriate for this conversation. Apparently, Robert Frost was asked in 1954 at his 80th birthday party, “In all your years and all your travels, what do you think is the most important thing you have learned about life?” His reply was reportedly, “In three words, I can sum up everything I’ve learned about life. It goes on. In all the confusions of today, with all our troubles…with politicians and people slinging the word fear around, all of us become discouraged…tempted to say this is the end, the finish. But life-it goes on. It always has. It always will. Don’t forget that.” Let us all take Mr. Frost’s wisdom to heart, stay on the course we have charted, and know that whatever financial challenges await us in the years ahead, we will be able to get through them together.
Best Wishes,
Ted Haley, CFP® AIF®
President, CEO