The phrase “The British are coming” is attributed to Paul Revere’s ride in 1775. The phrase “The Recession is coming” can be attributed to hundreds of prognosticators in 2022. Some economists have been saying rather ironically that if or when this recession does arrive, it will be the most anticipated in history. But when you assume that something will happen, you also have the time to anticipate, prepare and even protect against it.

Despite the economy ending 2022 with positive growth, last year’s stock market declined around 18%, and we’re still on edge. So where is the recession we were promised? Will it be bad? What does a recession mean to us?

It seems like the wait is worse than the anticipated outcome. Some of us remember the old days of waiting for a NYC subway after a late Saturday night outing. You don’t know if the train will come in a minute, an hour or never (pre-Wifi of course). It’s a test of anyone’s nerves! With ‘only’ 11 months left in 2023 it’s worthwhile taking stock.

For now, unemployment remains historically low, inflation appears to be subsiding, and China may finally be waking up from its Covid slumber. So far in January, the stock market has had an impressive 6%1 recovery. Some are starting to believe that the economy is in for a ‘soft landing’ (lower inflation while avoiding recession) or that we may skim the bottom but avoid recession altogether. How different this is from just a few months ago when the likes of JP Morgan and Goldman Sachs were ringing increasingly loud alarm bells.

With sentiment jumping from highs to lows, Longwave is looking to history for guidance. There are many possible markers that can help predict whether a recession is coming. One is a steep decline in stocks like we saw last year. Another is when consumers start to close their wallets and purses (beginning). A third when the Fed goes through a rate hiking cycle (soon ending). These are just three possible ‘leading indicators’ but for the moment these three all look to be in play for 2023, suggesting an elevated chance of a recession in the next 12-18 months.

As for why we have not already entered a recession, GMO Asset Management2, a respected investment firm, believes the following:

One important contributor to the resilience of the economy so far has been the enormous accumulation of excess cash that resulted from the Covid-19 stimulus… most analysts put the peak of excess savings at $2-3 trillion in late 2021. This excess savings balance has been slowly drawn down over the course of 2022, but less than half now remains. Once it runs out, by some estimates around mid-year, this particular support for the economy will be gone.

Right now, across the economy, people are dipping into savings rather than cutting back. But for most of us, we want to neither give up familiar comforts nor hard-fought luxuries. While it’s true that the rate of inflation has gone down from 8% to 6% recently, things continue to get more expensive. In fact, since December 2020 a basket of household goods has increased in cost by 15.5%3. It takes time for higher prices to trickle down to peoples’ purchasing decisions.

Another tailwind that is helping to delay or perhaps avoid recession is the low unemployment rate:

Employers are reluctant to let workers go. And with company’s margins near all-time highs, there is room to hold on to workers. That is why jobless claims keep falling, and the unemployment rate remains at its lowest level in more than 50 years… In other words, we are in a production recession but not an employment recession. - Apollo Research4

Could higher prices lead to lower spending and hurt company profits? For 2023, it’s anyone’s guess whether inflation subsides or persists, but as investment managers, this will be what we keep our eye on this year. As financial planners however, we think in terms of decades rather than focusing on year-to-year stock market volatility. As we’re fond of saying, turbulence is a normal part of the journey. Whether your financial ‘destination’ is many years away or you are currently retired, the most important thing you can do today is live within your means.

Recessions, although not enjoyable, are natural and financial plans are designed with them in mind. Experience with past recessions teaches us how to handle their inevitability:

1. Stay invested - The media, social and otherwise, is made to be noisy and attention-grabbing. Don’t let the noise derail you or shake your confidence in the plan we’ve thoughtfully crafted together. Whatever stock market outcome you’re worrying about, we’ve already considered it.

2. Sidestep pain, if possible, by staying diversified - At Longwave, we believe you don’t change your principals in the face of adversity. In the past there have been reliable ways to avoid the worst volatility that economic adversity has to offer which includes focusing on value stocks, owning international stocks and a healthy mix of bonds.

3. Keep a lid on spending to preserve your investments - Over the past decade the economy experienced a great expansion. While the benefits were not always distributed equally, many households benefited from a strong jobs market, rising home prices, and rich portfolio values. Simply put, people spent money because they kept making more (and the government kept printing more). We think the next 12-18 months is a good time to be more judicious. An economic slowdown may not come but if it does, you will be better positioned.

Balzac wrote that “our worst misfortunes never happen, and most miseries lie in anticipation.” Every new year, we focus on the work at hand, knowing that we’ve planned for inevitable change. That’s the right way to consider the market and your portfolio as we continue into 2023. Cautiously, judiciously but with the same long-term outlook that is a hallmark of many Longwave clients.

1 YCharts.com S&P500 Total Return Data https://ycharts.com/indices/%5ESPXTR/level#:~:text=27%2C%202023

2 “After A Timeout, Back To The Meat Grinder!” by Jeremy Grantham, Published by GMO Asset Management, 1/24/23 https://www.gmo.com/americas/research-library/after-a-timeout-back-to-the-meat-grinder_viewpoints/

3 By Brandon Wester, Calculated from data provided by The Bureau of Labor Statistics bls.org

4 “Labor Hoarding Playing a Key Role at the Moment” by Torsten Slok, Published by Apollo Academy, 1/25/23 https://apolloacademy.com/labor-hoarding-playing-a-key-role-at-the-moment/

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Cloudy with A Chance of Recession