How Investors and Financial Advisors are Managing Recession Worries

It seems to be official – in the popular sense.

The U.S. economy shrank 0.9% in the second quarter, following a 1.6% contraction in the first three months of 2022, according to highly anticipated Commerce Department data released Thursday. The unfortunate numbers mean we’re in a recession, by a popular definition that takes two consecutive quarters of annualized declines in national output as a marker.

The unofficial definition, which stems from the 1970s, girdles many investors’ understanding of an economic downturn. But the designated arbiter of the “R” word is the National Bureau of Economic Research, a nonprofit organization in Cambridge, Massachusetts. And so far, the non-partisan NBER says that we are not in a recession. Nobel Prize-winning economist Paul Krugman brought this point home Thursday in a New York Times editorial“The US economy is not currently in recession.

The NBER’s own definition — “a significant decline in economic activity that is economy-wide and lasting for more than a few months — is subject to subtle variations and nuanced interactions between depth, breadth and depth. duration of a decline. It also takes into account employment levels, consumer spending and wages. The definition of two consecutive quarters appeared in 1974, in a New York Times editorial by economist Julius Shiskinthen head of Commerce’s Bureau of Labor Statistics.

What is clear is that the economic malaise has lodged in the temporal lobes of financial planners and worried clients. As the Federal Reserve raises interest rates to fight persistent inflation, here are the observations of five wealth management advisors, as well as what they tell their clients.

James Cox, financial advisor and managing partner at Harris Financial Group in Richmond, Virginia
“Advisors and other market participants are pretty happy to see that we actually know the economy is in a recession. It’s a way of knowing that interest rates probably won’t go up much more. It’s a good thing. Markets are up today. The main driver of the market decline has been rapid rate increases. The Fed can’t raise rates much more, or it could really hurt employment. .

Jim Pratt-Heaney, co-founding partner and chief investment officer at Coastal Bridge Advisors in Westport, Connecticut
“Oh no! What about the ‘R’ word? Wasn’t last week the ‘I’ word (inflation)? Last month the ‘W’ word (War)? Or was it the “F” word (Fed) The fact is that customers and businesses cannot react to every ‘Catastrophe du Jour’.

“A proper financial plan for a client should include recession, inflation, political changes, etc. We achieve this by using Monte Carlo simulations as a stress test. They of course include all of the above.

“What should you be doing differently today, after the GDP figure, that you weren’t doing yesterday? ” Nothing. I don’t dismiss the problems of a recession, or its effects on customers, but I think making customers believe they have to react to all these news flashes is even more harmful.

“If an RIA company has done a good job with each client’s plan, then they too shouldn’t suffer or be surprised by changes in the economy. Of course, it would be great if all asset classes grew and the Goldilocks economy continued, but we should be better informed and plan accordingly. Finally, customers do not focus on this data as professionals do. They focus on ‘Am I okay? It is our job to be able to answer “yes”.

Iraklis Kourtidis, co-founder and CEO of Rowboat Advisors, a software company for investment portfolios in Menlo Park, California
“I lived through the rise and fall of the dot-coms (1995-2000), so over the last three quarters there are a lot of markers that look a lot like what was happening back then. Since 2008 the government defibrillated the economy pumping out cheap money The only thing different now is inflation that’s why this time will be different It’s gonna be worse than what most people think Stopping inflation will make the recession worse.

Todd Mackay, president of Dallas-based advisor Avantax Wealth Management
“My view is that regardless of the final indications of a period of recession or not, markets have been pointing to slower growth for many months now. So the right advisors have and will continue to put the emphasis on the importance of comprehensive financial planning with their clients and the idea that their plans have been put together based on their goals or aspirations.

“All of these plans and planning software take into account thousands and thousands of economic and financial scenarios based on the client’s risk tolerance. And so the conversations that finance professionals have had for many months now are, ‘Is your plan in place?’ And you continue to stay on track.

Angie Spielman, founding partner of Manhattan West in Los Angeles
“I think we’ve already seen most of the impact of this inflationary environment. It has already been evaluated in the market. We may have a bit of a way to go in the next few months, but I think most of it has already been integrated.

“A tilt towards value has certainly helped our portfolios. I don’t think anyone has been fully covered when it comes to this market. Every aspect of the markets is suffering, but value is certainly less than growth. It certainly helped us compared to our benchmark. On top of that, we’ve always believed that a third of your portfolio should be invested in some sort of alternative investment, depending on your risk profile and investment horizon.

“We expected that the bull market would not last forever. And I think customers have understood that, so the panicked phone calls I’ve received are more of an emotional conversation than a financial one. It’s just a matter of ‘we’ll get through this’. You are a long-term investor. There is a lead.’