With Bank of America predicting a mild recession in the second half of 2022 and TD Securities recently reporting that the odds of the US economy falling into a recession by next year are greater than 50%, many of us are concerned. Why should it matter? A recession would bring widespread layoffs, along with higher borrowing costs and turbulence in the stock market. Much of which we are starting to see.
Despite how concerned we all feel it is important that we have a strategic plan of action to get us through these tough times.
Here is what we know
- The US is experiencing the highest rate of inflation in decades, driven by global supply chain disruptions, the injection of federal stimulus dollars and a surge in consumer spending. In real dollars, the 9.1% rise in consumer prices is adding over $400 more per month to household budgets. And the rate of inflation of goods and services is far higher — for example, gasoline has increased nearly 59.9% in the last 12 months.
- Policymakers consider 2% to be a “normal” inflation target. The country’s now experiencing over four times that figure. It is the largest jump in annual inflation since 1980 when the inflation rate tapped 13.5% following the prior decade’s oil crisis and high government spending on defense, social services, health care, education, and pensions. The Federal Reserve increased rates to stabilize prices and, by the mid-1980s, inflation fell to below 5%.
- The silver lining, as overall inflation rates jump, it may be that we’ll see personal savings rates increase. Bank accounts are starting to offer more attractive yields, while Series I bonds — federally backed accounts that more or less track inflation — are attracting savers, too.
Mortgage rates
- As the Federal Reserve continues its rate-hike campaign to cool spending and try to tame inflation, the rate on a 30-year fixed mortgage recently jumped annually by nearly 3 percentage points to almost 6%. In real dollars, that means that after a 20% down payment on a new home (let’s use the average sale price of $429,000), a buyer will roughly need an extra $7,300 a year to afford the mortgage.
- Rising interest rates will cause the housing market to cool slightly. As the cost to borrow continues to increase with mortgages becoming more expensive, homes could experience fewer offers and prices would slow in pace.
Stock market
- Year-to-date, the Dow Jones Industrial Average — stocks are down much more. The Nasdaq is off more than 28% since the start of the year. The benchmark S&P 500 is still at a 20% drop from January, which brought us officially into a bear market. As workers return to the office and people move away from digital back toward in-person experiences, analysts say the bubble is bursting for companies like Amazon and Netflix whose profits ballooned during the pandemic.
- History tells us that the stock markets can rise and fall rather quickly. In March 2020, during the early days of the pandemic the Dow Jones Industrial Average dropped by 26% in four trading days that month only to rebound in April 2020 and began a bull run lasting more than two years, as the lockdown drove massive consumption of products and services tied to software, heath care, food, and natural gas. In 2008 and 2009, a crisis in the housing market and financial services sank the Dow to nearly 55% from its 2007 high. But by fall 2009, it was off to one of its longest winning streaks in financial history.
Unemployment
- While unemployment has been holding steady at 3.6%, more job losses are likely on the horizon with the pending recession.
- Interest rate hikes may affect corporate profits, leading to more layoffs and hiring freezes.
- Be prepared to show your employer with documentation why you are a necessary member of the team. And at the same time, review your reserves to see how far you can stretch saving in case you are out of work. And don’t forget to update your resume, just in case.
How to prepare for a recession
- Reduce expenses—It is important that you set up a budget, cutting expenses where you can, and then sticking to it.
- Increase your emergency fund—during these challenging and uncertain economic times it is important to be prepared for the unexpected. Put away enough savings to cover your living expenses, at a minimum 3 – 6 months, more if you can handle it.
- Pay down debt—Focus on any high-interest rate debt and start paying it down. The Federal Reserve is expected to raise rates so the sooner you pay off the debt the more money you will have for your emergency fund or living expenses.
- Lock interest rates now—Interest rates will go up to help bring inflation rates down. If you have private variable rate loans you may be able to consolidate the debt into one fixed-rate loan. As interest rates rise you won’t feel the stress of having to worry about unexpected payment increases.
- Seek a second income stream—The job market may be volatile during a recession in one area but not another. By diversifying your income steams you may be able maintain some cash flow should you lose your job.
- Stay invested—The best advice you can follow is to remember that you are in it for the long term. Don’t panic and cut back on your 401 (k) or get out of the market altogether. History shows that bull markets last longer than bear markets. This is a good time to review your portfolio with your investment advisor to make sure your investments remain properly weighted and aligned with your risk tolerance and investment goals, even as the market swings and are well-diversified and positioned with a portfolio that will ride the recession well.
- Take care of your valuables—We have seen the high price of automobiles, and home materials all related to supply chain issues. If you can, keep up with the maintenance of your car and home so that you won’t have expensive repairs down the road and not need a replacement in this market
Should you need assistance in planning your financial future during these turbulent times, please call Felsing LLC at 407-412-9299 or email us at info@felsingcpa.com
Source: CNET, Farnoosh Torabi, July 3, 2022, July 12, 2022; CNBC, Michelle Fox, July 5, 2022. For additional information refer to US Bureau of Labor Statistics, TED: The Economist Daily click here; and CBS News: Money Watch, July 13, 2022 click here.