What are the Chances of a Recession? And Why It May No Longer Matter ?!?

What are the Chances of a Recession?

And Why It May No Longer Matter ?!?

In the Fall of 2021 inflation suddenly exploded and the Federal Reserve began their response in a slow methodical way. As a result, the Fed Funds rate has increased from zero to 4.5% as the Fed’s deployed its go-to tool to slow the economy. In fact, many segments of our economy are showing signs of inflation beginning to slow. The sticking point right now is the jobs market. We still have more job openings in our economy than people looking for work despite the well-publicized layoffs in the tech sector. This is perceived to be a problem because high demand for workers forces employers to pay more to keep existing workers or attract more workers. This in turn puts more money in people’s pockets which they spend on products despite higher prices and the inflation cycle continues.

Please keep reading. It will ultimately make sense and not have too much jargon.

The Federal Reserve’s target for inflation is 2%. For the sake of conversation, let’s just say it is currently 5%. The Fed Funds rate is the rate that the Federal Reserve charges member banks to borrow money is now 4.5%. When inflation peaked at 9 or 10% that Fed rate was at 1.75%.

The question that drives the markets crazy is “How much higher and how fast will the Fed increase rates to get inflation back to 2%?” Up until Friday, Feb 3, markets were thinking that the worst of rate increases were over, inflation was moderating, and the Fed would soon be able to begin reducing interest rates. Then that “awful, terrible, very-good” jobs report was published. Unemployment is down and wages up. Yes, this is really great news for workers. But at this moment, not what the stock market or the Federal Reserve wants to hear. Our reality is that the economy will likely need more interest rate increases to slow the economy and inflation. The stock market does not like the possibility of more rate increases.

OK….now comes the good part without the boring details.

This is the sticky part that often the popular media cannot seem to explain well. The media loves to YELL….RECESSION !!! and make it sound scary to get your attention.

Facts: the real facts….invest a few seconds, please read them !!!

There have been 14 recessions in the US since the Great Depression.
Eleven recessions in my lifetime.
Six recessions since 1980.

1980 recession lasted 6 months;

Unemployment peaked at 7.8% & GDP decreased 2.2%

1981 -1982 recession lasted 16 months

Unemployment peaked at 10.8% and GDP declined 2.7%

Early 90’s recession lasted 8 months

Unemployment peaked at 7.8% and GDP declined 1.4%

Early 2000’s recession lasted 8 months

Unemployment peaked at 6.3% and GDP declined by 0.3%

“Great Recession” (12/07 to 6/2009) lasted 18 months

Unemployment peaked at 10% and GDP declined 5.1%

COVID-19 recession lasted 2 months.

Unemployment peaked at 14.7% and GDP declined 19.2%
This is the worst, deepest, most horrific recession and yet it lasted only 2 months.

Six recessions in fifty years. The durations were 6 months, 16 months, 8 months, 8 months, 18 months for the “Great Recession” and 2 months for the COVID recession.

The declines in Gross Domestic Product ---our economy—was 2.2% ,2.7%, 1.4%, 0.3%, 5.1% for “Great Recession”, and finally, 19.2% for the COVID recession when everyone went home and locked the doors.

The take-away here is not to argue if we will or will not have a recession; or whether we are already in a recession; or even how bad the recession may be. The take away is that recessions are temporary. Recessions are not an economic or stock market disaster. They happen. They last a few months to maybe a year-and-a-half. The stock markets may go down and if it does, it recovers to the previous high and then goes higher.

The most recent example is the COVID recession in 2020. The S&P 500 was at 3,380 on February 14 - Valentine’s Day. It dropped to 2,304 on March 20, 2020 during early lock-down. The S&P recovered to 3,500 by the end of August 2020. As I write this just before Valentine’s Day 2023, the S&P 500 is just over 4,000. Aren’t you glad you did not sell in 2020?

In closing, yes, recessions can feel scary. Especially, if you spend a lot of time reading the news feed on your phone and scrolling the internet. However, if you study history, you will realize recessions happen periodically and while they may impact us all in the short-term, the broad effects on the economy and the stock market have never been long lasting.

Plan your cash flow needs. Try to avoid selling in down markets. This is the time to buy. Buy when you have excess cash (not needed for spending) and sell only when you need cash (not when markets are down, if possible).

Wollman Wealth Designs, Inc is a financial planning and investment advisory firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.

https://www.thebalancemoney.com/fed-funds-rate-history-highs-lows-3306135

https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

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