It seems to be official — in the popular sense.
The U.S. economy shrank 0.9% in the second quarter, following a contraction of 1.6% in the first three months of 2022, according to highly anticipated Commerce Department data released Thursday. The unhappy numbers mean we’re in a recession, according to a popular definition that considers two consecutive quarters of annualized drops in national output to be a marker.
The unofficial definition, which stems from the 1970s, girds many investors' understanding of an economic downturn. But the designated umpire of the “R” word is the National Bureau of Economic Research, a nonprofit organization in Cambridge, Massachusetts. And so far, the nonpartisan NBER says that
The NBER’s own
What’s clear is that economic malaise has lodged itself into the temporal lobes of financial planners and worried clients. As the Federal Reserve raises interest rates to battle persistent inflation, here are observations from five wealth advisors, along with what they're telling clients.
James Cox, financial advisor and managing partner at Harris Financial Group in Richmond, Virginia
“Both advisors and other market participants are kind of happy to see that we actually know the economy is in recession. That’s one way you can know interest rates are not likely to climb much further. That’s a good thing. Markets are up today. The main driver of the market decline has been the rapid increase of rates. The Fed cannot raise rates much more, or it really risks affecting employment.”
Jim Pratt-Heaney, co-founding partner and chief investment officer at Coastal Bridge Advisors in Westport, Connecticut
“Oh no! What do we do about the ‘R’ word? Last week wasn’t it the ‘I’ (inflation) word? Last month, the ‘W’ (War) word? Or was it the ‘F’ (Fed) word? The point is that clients and firms cannot react to every ‘Catastrophe du Jour’.
“A proper financial plan for a client must include recession, inflation, political change etc. We achieve this by using Monte Carlo simulations as a stress test. They of course include all of the above.
“What should you do differently today, after the GDP number, that you weren’t doing yesterday?’ Nothing. I am not dismissing the problems of a recession, or its effect on clients, but I think making clients think they need to react to all these news flashes is even more harmful.
“If an RIA firm has done a good job with each client’s plan, then they, too, should not suffer or be surprised by the changes in the economy. Of course it would be great for all asset classes to go up, and the Goldilocks economy to continue, but we should know better and plan for it. Finally, clients don’t focus on this data like professionals do. They focus on ‘Am I OK? It's our job to be able to answer ‘yes.’”
Iraklis Kourtidis, a co-founder and CEO of Rowboat Advisors, a software company for investment portfolios in Menlo Park, California
“I lived through the dot-com boom and bust (1995-2000), so in the last three quarters, there are a lot of markers that look very similar to what was happening back then. Since 2008, the government has been doing defibrillation on the economy, pumping out cheap money. The only thing different now is inflation, so that is why this time will be different. It’s going to be worse than most people think. Stopping inflation will make a recession worse.”
Todd Mackay, president of Dallas-based advisor Avantax Wealth Management
“My take is that regardless of the final indications of recessionary period or not, the markets have been indicating a slowdown in growth for many months now. And so good advisors have been and will continue to emphasize the importance of comprehensive financial planning with their clients and the idea that their plans have been put in place based on their goals or aspirations.
“All of those plans and all of the planning software takes into account thousands and thousands of economic and financial scenarios based on the risk tolerance for the client. And so the conversations that financial professionals have been having for many months now is, ‘is your plan in place?’ And you continue to remain on track.”
Angie Spielman, founding partner at Manhattan West in Los Angeles
“I think we've seen the bulk of the impact of this inflationary environment already. It's already been priced into the market. We may have a little bit of a bumpy road ahead in the next coming months, but I think the bulk of it has already been priced in.
“A value tilt certainly helped our portfolios. I don't think anybody's been completely covered in terms of this market. Every aspect of the markets is hurting, but certainly value less than growth. So that certainly helped us versus our benchmark. In addition to that, we have always been of the belief that a third of your portfolio should be in some sort of alternative investment, depending on your risk profile and your investment horizon.
“There was an expectation that the bull market wasn't going to last forever. And I think clients understood that, so the panicked phone calls that I have gotten are more of an emotional conversation than financial. It's just a matter of, 'we're gonna get through this. You're a long term investor. There's runway.'”
