Yes. After some time in the woods of Healthy, Wealthy, and Wise, we're back to what we know best and where we believe we can add value. Not that health and wisdom don't deserve attention, but they deserve more than we can give them.
We're also reminded of the phrase "stick to your knitting." Focus on what you know and don't get distracted by wandering from your area of expertise. That's from the 17th-century Dutch proverb, "Shoemaker, stick to your last." These days the term is used to encourage people to stick with their core strengths rather than delve into areas where they might lack expertise.
So, back to our core strengths.
We've been intentionally quiet for a while as the election results unfold. From an economic and investment standpoint, the likelihood of a recession seems to be building.
The nine-point template below is offered as a model for this part of an economic cycle. The points are roughly sequential. Yet there are always overlaps and some things are more dramatically presented by politicians and in the media than they need to be.
Also- and this is essential- avoid conflating opinions (which are unproven beliefs) with facts (which are verified knowns). Especially don't conflate strongly held beliefs (like democracy is coming to an end) with what's known (institutions are amazingly resilient). Doing so is a recipe for frustration, poor decisions, and disappointing results.
We'll start with our basic opinion (belief). It's that the U.S. is in the late stage of an economic expansion. That would have been true even if Harris had been elected. But it won't become a fact (known) until we all see it in the rear view mirror. This list builds on that opinion.
1. Asset Values Decline. There are three major assets- real estate, stocks, and bonds.* This point is first on the list because markets "price in" future expectations every day. Markets are forward looking. They tend to ignore the daily news unless it changes future expectations. That said, not all declines are forebearers of recessions, but all recessions have been preceded by asset declines.
2. Demand for Goods and Services Slows Down. For whatever reasons, consumers pare back their spending. This is important because consumers create about 70% of economic value. Major companies like Wal-Mart, Target, and Delta Airlines have recently guided analysts lower regarding their year-ahead expectations. That handwriting on the wall is getting priced in.
3. Unemployment Rises. This happens when businesses start guarding their capital and income statements more closely. One way to control costs is to pause promotions, pause hiring, and maybe even lay off workers.
4. Corporate Profits Weaken. Companies earn less due to weaker demand, leading to more aggressive cost-cutting measures. But they can't save their way to prosperity.
5. GDP Declines. With some considerable lag time, the effects of 2, 3, and 4, above, show up as a decline in Gross Domestic Product. GDP is the value of all goods and services sold. Despite being "priced in", media treatment tends to underscore the pain.
6. Interest Rates Fall. Think of interest as the cost of money. When businesses contract, there is less demand for money, hence a lower cost. This also means bond values increase. Interest rates and bond prices are the inverse of each other.
7. Asset Values Start to Recover. This seems to happen for no good reason at all. Who wants to buy stocks when companies are struggling? There's a saying that "markets climb a wall of worry." Yes they do, like during the early days of Covid when recession was setting in. A recovery was being "priced in."
8. Government Intervenes. Policymakers introduce stimulus measures. This is generally done by the Federal Reserve and/or Congressional action. It usually involves some combination of tax reductions, direct payments, and increased government spending.
Recessions can vary in severity and length, but they are a natural part of the economic cycle. The good news is that every recession has been followed by a recovery.
✔ What might all this mean to you? What's actionable on your part?
If you're currently employed...
...be thinking now of what an income interruption would mean to you. It's quite risky to wait until a job loss actually occurs to take action. Have enough cash on hand to handle 12 months of basic spending. That cash belongs in a savings account, money market, or bond fund. It does not belong in the stock market!
...continue to fund your retirement plan. Market declines are a gift from the market goddess that allow you to buy assets on sale.
If you're no longer working for income and living off pensions and portfolio assets...
...pensions will continue unabated. There's nothing to do.
...portfolio assets will move in line with overall market trends and the portfolio's asset allocation. Avoid the temptation to "get conservative." In fact, it's often a good time to get more aggressive, to "buy low."
None of this constitutes individual personal finance advice. Reach out to one of us to discuss your personal situation.
Evidence-based. Rules-driven. Policy-focused.
Note:
* In the U.S., real estate accounts for 48% of all assets, stocks are 36%, and bonds are 16%.
