Dealing with the impact of a recession

Are we heading towards a recession? Probably.

Are we already in one? Maybe.

Is the full weight of a recession already priced into the markets? Most likely.

Does it really matter? A recession doesn’t have to spell disaster for your retirement plans. With the right strategies you can not only protect your savings but actually take advantage of the temporary dip in the markets to come out further ahead.

I wrote back in May of this year that, at that time, most of the important economic conditions we track (often called “key recessionary indicators”) were not yet pointing to a recession occurring in the next 12 months. In fact, only two of the 10 key indicators were “red” at that time.

Fast forward to today and now almost all of these same indicators are in fact “red”. This would suggest that a recession is now much more likely to occur and our best guess it would officially begin in the first half of 2023.

The key here however is understanding that recessions are a normal part of market cycles. I mentioned in my May column that “as soon as one recession ends, we are headed towards the next one”. A more important question for me than “will we have a recession” is if we’re looking at a smaller or larger one.

Looking again at the key indicators we survey; all signs point towards a smaller one at this stage. Why is that? A few key data points include:

• Yields are higher than they have been in years

• Equity market valuations are already decently lower than their latest highs

• The recent pullbacks are more due to overvalued markets and not a major economic event

Now for the positives:

• Consumer confidence/sentiment indexes are at a 40 year low – pretty much every time in history this has happened the markets and economy have had a stellar run shortly after. The famous Warren Buffet quote “be fearful when others are greedy and greedy when others are fearful” still rings true today and tells me now is the time to be more optimistic since most others are not.

• Stock markets have already dropped – Looking at a chart that shows every time the S&P 500 (US market index) had a 25 per cent or more decline since 1950, the following 5 years has averaged a +83.3 per cent growth rate.

• Inflationary pressures are already abating, and central banks may (should) soon follow.

I am not saying we’re at the bottom yet for sure but using history as a guide this is telling us we are close and setting up for a good run. Equity markets typically drop (and recover) ahead of the economy as a whole.

The biggest risk in this type of economic environment is for those who are just about to enter retirement. A drop in portfolio values coupled with rising inflation could significantly alter your longer-term retirement plan calculations depending on when you plan to start drawing out income. So, if this sounds like you, now is the time to check in on your retirement plans.

Many of those already in retirement however will actually benefit more from the recession since they typically aren’t carrying any debt and their more conservative portfolios will benefit more from rising yields.

Those that are still working towards retirement can capitalize the most if they look past the fear levels that are rising to decide what opportunities exist.

Fortunately, there are many steps you can take and strategies you can consider, regardless of what stage you’re at, to not only weather a looming recession but actually come out of it better than you went in. Times like this are where it’s more vital than ever to have a comprehensive financial plan in place that can clearly illustrate variables such as a recessionary pullback or interest rate increases and how they affect your overall plan.

This article is provided as a general source of information and is not intended as specific investment advice or as an endorsement of any specific investment strategy.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.