Strategic Planning Group Fall 2023 Newsletter

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Understanding Recessions: Navigating the Natural Ebbs and Flows of the Economy By John Park From investments to complicated retirement strategies, John works to educate and advise his clients on making smart financial decisions. There has been a lot of speculation throughout this year about the possibility of a recession. By way of high interest rates and tightening the money supply, the Fed has been aggressively battling inflation for some time. These measures have the potential to cause a recession. Ultimately, I’d much rather experience a recession than unchecked inflation. Let me state clearly though, I’m not saying we are in a recession right now, nor am I saying we are for certain going to be in one. It is a possibility, however. So, let’s talk about that. Many economists are predicting a mild to moderate recession due to the long-lived nature of our current battle with inflation and government spending. Be careful how you react to this though; these economists have been wrong before and many that I follow expected a recession to hit late last year or early this year. They have been wrong so far. Also, I will say there is an equal number of economists predicting a “Goldilocks” scenario where the economy’s reaction to battling inflation isn’t too hot or too cold, it’ll be just right. I hope that’s the case. I’ve been joking with my clients all year about my bold prediction of whether we’ll have a recession or the Goldilocks scenario: I’d give it a 50/50 chance either way. That’s my humble admission that I just can’t predict the future sometimes… Obviously a Goldilocks scenario is ideal. It won’t be a source of concern for investors though. So, I’m going to focus on the recession scenario in this article. The word "recession" often evokes apprehension and conjures images of plummeting stock markets, unemployment, and financial turmoil. However, it's essential to understand that recessions are a natural part of the economic cycle, just as growth periods are. They're not always severe, and with the right knowledge and strategies, individuals and businesses can navigate them adeptly. I want to help you have a proper perspective of recessionary times, if we are going to have one or are in one now. 1. Nature of the Economic Cycle: Like the changing seasons, the economy undergoes phases – expansion, peak, contraction, and trough. A recession falls in the contraction phase, where economic activities decrease. Once the contraction ends, the economy moves into the trough and eventually back to expansion. Understanding this cycle helps demystify the nature of recessions. 2. Not Always Severe: It's crucial to distinguish between a regular recession and more severe economic downturns like depressions. While the latter can last several years and cause significant distress, many recessions are relatively shortlived. The average post-World War II recession in the U.S., for example, lasted about 11 months. 3. Causes: Recessions In Perspective Recessions can be triggered by various factors – from abrupt financial shocks and global events to accumulated imbalances in the economy. The cause often dictates the severity and duration of the recession. Strategic Planning Group 6
Smart Financial Decisions During Recessions 1. Emergency Fund: We consistently recommend maintaining an emergency fund, and its importance becomes evident during recessions. Having three to six months' worth of expenses in a liquid form can be a lifeline if there's a job loss or reduced income. 2. Diversify Investments: A well-diversified portfolio can help weather the storms of a recession. While certain sectors or assets might experience downturns, others might stay stable or even grow. Diversifying investments across asset classes, industries, and even geographies can help reduce potential losses. 3. Avoid Panic Selling: History shows that markets rebound after recessions. Selling assets, especially stocks, during a downturn can lock in losses, while holding onto them offers the potential for recovery and growth once the recession passes. 4. Limit Debt: Reducing unnecessary expenditures and avoiding accumulating more debt than necessary can offer more flexibility during economic contractions. High-interest debts, such as credit card debts, should be especially avoided or paid down. 5. Stay Informed and Seek Advice: Financial decisions during a recession should be wellinformed. Staying updated about the economic environment and seeking advice from financial advisors can provide clarity and direction. Responding To Recessions: An Optimistic Approach Instead of seeing recessions solely as periods of adversity, they can be viewed as opportunities for reassessment and growth. Businesses can reevaluate their strategies, cut inefficiencies, and explore new markets. Individuals can invest in personal development, seek new skills, or even find assets at discounted prices. A major silver lining of a recession is that it would probably quickly bring down inflation. Not to be too redundant, but again, I’d rather face a mild to moderate recession than unchecked inflation. In conclusion, recessions, while challenging, are inevitable phases of the economic cycle. If we are in one or going to be, that’s okay! Recessions are not always severe and can be navigated successfully with understanding and prudence. By staying informed, making smart financial decisions, and maintaining an optimistic outlook, we can not only endure but also thrive during these economic ebbs. Just remember, we are your advisors through times of trouble, turmoil, tumult, and chaos, and even the good times (just in case the sun does rise tomorrow) … Come what may, we will be ready to deploy sound financial strategies for you. Recessions Are Not Always Severe And Can Be Navigated Successfully With Understanding And Prudence. 7 Strategic Planning Group
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