Recessions part of normal, healthy business cycle

Are we headed for a recession? Nobody knows. OK, that was fun. See you next month.

Just kidding – kind of. Nobody knows. As your boring, friendly neighborhood financial planner, I’ve preached for years that nobody knows anything. Who will win the election, what will the stock market do, the Chiefs will win on Sunday. No amount of education, experience or expertise can make you a good predictor.

To quote Kip from Napoleon Dynamite, “How can anyone even know that.” True.

But let’s talk about recessions—what they are and what we’ve learned from the past. Buckle up and get ready for my fun, easy to understand economics lesson.

A recession is often seen as the economy (gross domestic product) declining two quarters in a row.

There are several things that generally occur before a recession. One of them is known as – big word alert – inverted yield curve. Stay here with me and don’t be afraid. That means interest rates are higher on short-term bonds than long-term bonds. Which is opposite of normal conditions. As of October 23, My Trading Software is offering a one-year Treasury bond with 4.5 percent interest. A 10-year bond only gets you 4.2 percent interest. Hmmm… normally the more you go, the more interest you get. Just like your mortgage – you pay more interest on a 30-year loan than a 15.

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We reached an inverted yield curve in July 2022. This preceded the last 50 recessions. On average, the yield curve inverts 14 months before recession occurs. oh oh If history repeats itself, we would be in recession in the fall of 2023, just consider this one factor. But there is never just one factor with anything in life, especially the economy.

Here’s the good news: Although painful, recessions are part of a normal and healthy business cycle because they clean excess from the economy. That can be inflated stock prices, too much debt, housing bubbles, dot-com bubbles, etc. They did not last long: on average, two to 10 months.

It’s fun to blame them on presidents (we’ve heard the “Bush recession” and I’m sure we’ll hear the “Biden recession”). But it is a clear boom-bust cycle for the economy, and it does not follow presidential terms. In fact, these cycles tend to be global. Case in point: Today we see inflation in the US. US, but it is much higher in many other parts of the world.

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What does all this mean for your portfolio? As usual, the best advice is: don’t get mad. Interestingly, the stock market usually lowers around six to eight months ahead of the economy. It has also historically recovered about six to eight months before the economy.

Please don’t misread any of this as predicting if or when we will have a recession. Think about Kip: “How can anyone even know that.”

Almost any financial planner will tell you that it is “timing the market” that gets you results, not “timing the market.” We do not want our clients waiting for the market to fall and predicting its rise. After that, you can make lemonade from lemons in a bad market year like 2022:

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• Invest more. You are buying at lower prices.

• Make your portfolio more aggressive by adding more stock and reducing conservative investments (cash, bonds, CDs, annuities)

• Sell investments that have grown, to reduce your eventual capital gains tax.

• Selling investments that have declined to claim a loss on your tax return.

Note: These are quite complex strategies. Talk to your financial planner about whether this is right for you and your accountant as we do not provide tax advice.

So there’s your fun economics lesson. Turn in your papers before you leave class and don’t forget to study for the exam next Thursday.

Travis Ford is a certified financial planner with Wallstreet Group Advisors in Jefferson City. Securities and advisory services offered by CreativeOne Securities, LLC member FINRA/SIPC and an investment advisor. Wallstreet Group Advisors and CreativeOne Securities, LLC are not affiliated.

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