As we have opined for quite a while, the Fed will beat inflation. A correlation to that is there was usually some economic contraction (or recession) that would go with it. It seems like the universe woke up last Thursday and came to the same conclusion. In a few trading days, the interest rate on the 10-year Treasury dropped 13 percent. Similar numbers are seen for mortgage and investment grade bond yields. The unicon’ish soft landing would seem to be in peril. Add in a potential war in the middle east with Israel and Iran, the markets are doing what markets do. Considering we haven’t had a 10% pullback (as measured by the S&P 500) in over 2 years, it would seem rather mundane.
Looking ahead, and in anticipation of the media drumbeat of “recession”, let’s do a quick review of what it means. As discussed many times over the years, it simply means negative growth for 2 consecutive calendar quarters. More to the point, it’s slow or no growth at a total level. Doesn’t mean EVERYTHING goes bad, means some things do. Recessions yield winner and losers. High cost, high price producers lose, and lower price firms grab market share. The overused “creative destruction” term is highly applicable during economic down turns. Recessions cull the herd and reset the playing field. It’s a necessary evil of capitalism for its long-term viability.
From a “what does this mean for me” perspective, history would suggest the following. Folks who have a solid and reasonable financial plan with a well-diversified and risk tolerant appropriate portfolio traditionally sail right along. People who took excessive risks, used leverage, or chased rainbows, usually don’t fare well. Selling in a panic doesn’t normally end well, nor does chasing the hottest new thing. Experience has shown us its less about how much you made in good times than how much you lost in bad. Everyone has a choke point, and the goal is not to hit yours along the journey.
Economically, recessions actually benefit us as consumers (provided one has disposable income and isn’t debt ridden). Cost for things stabilize and actually come down in many areas. Retailers offer sales (remember those!) to clear inventory. Prices for hotels, airfare, cars, computers, etc often decline as the economic slowdown impacts their revenue. If we do go into recession, interest rates on loans, home equity, and mortgages will decline so refinance and take advantage of lower cost of money.
As always, we are here for you and available to talk about this or any other subject. Don’t hesitate to reach out if you want to discuss anything or have any questions about your own portfolio.
Ed, Frank, & Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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