Is Recession Imminent or Avoidable?

Recession: Imminent or Avoidable?

March 11, 2022

Headlines drove market action this week. They focused primarily on the latest developments in Russia’s war on Ukraine’s cities and citizenry, but also on still-rising inflation.

And talk about volatility! On Monday, the NASDAQ Composite entered a bear market (off more than 20% from its November high) and the S&P 500 slipped into correction territory (down more than 10% from its January peak); Wednesday, the NASDAQ surged and the S&P had its best one-day return since June 2020. Meanwhile, oil prices dipped on Monday, spiked Tuesday, dropped on Wednesday and Thursday, and were ready to rise again on Friday following news of new U.S. sanctions against Russia and Belarus.

The only constant: Sticker shock. The latest consumer price index (CPI) reading reflected inflation ticking up 0.8% in February—hitting a 40-year high of 7.9% year-over-year. Excluding food and energy, “core inflation” has risen 6.4% over the past year. With oil well above $100 a barrel all week, prices at the gas pump averaged a record $4.33 per gallon nationwide and are still rising.

Persistent inflation puts additional pressure on the Federal Reserve to raise interest rates despite escalating fears that higher rates could snuff out economic growth and tip global economies into recession—a prospect that seems more plausible for the eurozone than the U.S.

Yet the combination of an upbeat jobs picture, expectations for modest GDP growth in the U.S. and the $1.5 trillion spending bill Congress just passed provide multiple slivers of hope that recession will be avoided. We appraise these economic lifelines while acknowledging that hope must be much harder to muster for the people of Ukraine today. (If you’d like to discuss charitable giving strategies or adjust your current gifting plan in light of what’s going on in Eastern Europe, we would be happy to help.)

This table shows total returns and yield information for major U.S. and developed market indexes.

Investment Lessons From Shackleton

Endurance was discovered this week. We mean the wreck of explorer Ernest Shackleton’s ship, crushed in the grip of Antarctica’s ice 106 years ago and found nearly two miles below the ocean surface. The vessel was lost, but the entire crew survived thanks to the perils Shackleton himself endured when he traveled 800 miles through the roughest and coldest seas on the planet in an open lifeboat to rescue his men.

Endurance is on our minds as we digest the valiant efforts of the Ukrainian people to fight an unjust and inhumane war. But it’s also in our thoughts as investors and advisers. It requires endurance to stay invested in markets as volatile as the ones we’ve recently experienced, particularly after the relative calm of the past decade—the sudden and short-lived COVID-19 bear market in 2020 notwithstanding.

Tempestuous markets often don’t feel rational or efficient. Especially after last year’s smooth sailing, when the S&P 500 fell nary 5% from its prior high. But this year’s spate of radical intraday moves has a good explanation. Investors haven’t had to contend with a war in Europe or high inflation in decades. Add the Fed’s plans for possible quantitative tightening and a high level of investor and consumer uncertainty is understandable.

Prices will continue to bounce around day to day, and there may be more pain in store for traders. But we believe long-term investors are going to be the winners here.

The annals of stock market history are littered with reasons to sell, including wars, recessions, assassinations and, yes, invasions. It’s almost certain that most of those who sold during these periods of tumult were unable to time their reentries with any great success. Think of the recent COVID-19 bear market, when the S&P 500 dropped 35% in just over a month and began a record-breaking bull run two weeks later. Remember, too, that on average, stocks drop about 14% at some point within each calendar year. At last night’s close, on a price-only basis, the S&P 500 index was 11.2% off its January high and down 10.6% year-to-date—a pretty normal market retrenchment.

Your best defense as a long-term investor is to tune out the noise. That doesn’t mean sticking your head in the sand and hoping everything blows over. But it may mean stopping yourself from checking your account value several times a day or even several times a week. Our suggestion? Remember Shackleton’s Endurance and endurance…but please call us if you are concerned and want to talk about your portfolio or financial plan.

Powell Caught Behind the Inflation Curve

The Federal Reserve seems likely to stick to its guns on Wednesday and announce its rate hike plans—just last week, Chair Powell reiterated that a 0.25% rate hike is in the cards, and we don’t think recent events will scuttle the central bank’s plans.

More telling than the interest rate announcement will be the press conference that follows. The Fed is caught between the hammer and the anvil, the need to tame inflation and the risk of sparking a recession.

Late last year, there were signs that core inflation might slow as the pandemic waned, employment rose and supply chain knots began to untangle. But the war has dimmed the prospect of the latter: Semiconductor shortages—one of the principal difficulties snarling automobile production—are set to persist, as Ukraine is one of the largest producers of the neon needed for chip manufacturing. And spikes in oil prices have been the harbingers of recession in several past crises, including the Arab oil embargo of 1973, the Iranian revolution in 1979 and the 2008 crash.

Inflation worries are already having an impact on sentiment: Small-business confidence recently hit a one-year low as worries about inflation increased to the highest levels since the early 1980s. Consumer confidence is also tracking lower, though as we’ve often said, focusing on what the consumer does rather than what they say tends to give a better picture of the state of the economy. So far, consumers are continuing to spend at the gas pump and elsewhere.

There is reason to hope that the current crisis may burn itself out without inflaming the global economy. Beyond commodities, Russia’s trade with the rest of the world is minimal. And as we’ve pointed out, historically, wars haven’t had a long-term impact on stock price growth. Judging by commodity futures, traders don’t expect today’s skyrocketing crude prices to stay as high as they are for long. While the oil crises of the 1970s are a sobering parallel, advances in energy efficiency have swept the globe: According to U.S. Energy Information Administration estimates, the world economy is 40% less energy intensive than it was in 1990 (meaning the cost to convert energy into economic output is significantly less today).

Meanwhile, job openings in the U.S. suggest that the economy is still growing—but also that labor shortages won’t find an easy resolution in the short run. The Fed will have a narrow line to walk to manage its dual mandate of taming prices and encouraging full employment without losing its footing.

Chart of the Week: Will High Gas Prices Lead to Recession?

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso 

As was drilled into me in Econ 101, two factors drive prices: Supply and demand. The past two years have certainly provided professors of the dismal science ample real-world examples we can all relate to—particularly at the gas pump.

If demand dries up, then prices fall. During the initial COVID-19 economic lockdown in the spring of 2020, demand came to a screeching halt. Working from home meant a lot less driving. So it was no surprise to see gasoline prices fall to around $2 per gallon, the lowest level since the global financial crisis in 2008.

Lately, we’ve seen the flip side of that coin. More people are commuting again, but many who have a public transit option are still using their cars instead. And, of course, Russia’s invasion of Ukraine has disrupted the supply of oil—in a big way. With demand rising and supply constrained, prices are spiking, as noted above.

High gas prices raise the risk of a recession; when you pay more at the pump, you have less to spend elsewhere. But it’s not a given. And while gas prices may continue to rise from here (you can’t just flip a switch to produce more oil and gas), the cure for high gas prices is…high gas prices. Should commuters begin to again see the benefits of either working from home or riding buses and trains, demand could quickly decline, once again proving the point my economics teachers made so many years ago.

Note: Chart shows average cost per gallon of gas in the U.S. on a quarterly basis from 12/31/93 through 3/7/22.
Source: U.S. Energy Information Administration.

Financial Planning Friday
5 Financial Habits to Break

In sports, even the flashiest of moves or the cleverest strategies won’t help you win if you haven’t taken the time to master the fundamentals. Likewise, even savvy investors fall victim to certain pitfalls when it comes to managing their finances.

Addressing these bad habits can help you build a stronger financial foundation:

  1. Not budgeting. Many people have a clear picture of major monthly expenses, like their mortgage and car payments, but they’re surprised to find how big a bite all the “little things” take out of their wallet. For example, spending $15 a day to buy lunch during the workweek will cost you about $3,900 a year. Creating a budget helps you develop a clear picture of your cash flow and prevent overspending. (Click here to read more on budgeting and download a copy of our Budget Worksheet to help you get started.)
  2. Not saving for emergencies. Fender benders, basement floods, the odd root canal—such unpleasantries happen to us all eventually, but many of us aren’t financially prepared for them. We recommend keeping three to six months of living expenses in savings to help cushion the blow of a lost job or major medical emergency.
  3. Not paying off your credit cards monthly. If you don’t have a clear picture of your cash flow, it can be tempting to simply carry over your credit card balance to the next month rather than risk an empty checking account. Keeping credit card balances with high interest rates can cost thousands in fees over time. Spending according to your budget, lowering your balances over time (once you have an emergency fund) and working toward paying your cards in full each month will boost your credit score, allow you to take advantage of credit card incentives and ultimately save you money.
  4. Not having a financial plan. A budget on its own isn’t enough to help you achieve your financial objectives. A financial plan serves as a road map, helping you pinpoint your goals, get the most from your assets, and identify gaps and weaknesses. You can’t put a price on knowing where you want to get in life and having a clear path to get there—a good financial plan can help bring you that peace of mind.
  5. Not talking about your finances. Finances can be a difficult topic to broach with loved ones; making sure you and your partner are on the same page about types of debt, spending habits, current assets and financial goals is important. We can help you get the conversation started if you feel stuck or would like some guidance.

If you’d like to talk more about your financial plan or want to break any of these habits, give your wealth management team a call. We’re happy to help.

Podcast: 5 Excellent Questions for Your Accountant

April 15 may well be a day of dread for most Americans. Working with an experienced accountant can help a lot. But how do you know when you’ve found the right fit? In this episode, a trio of our wealth management experts—David Mastroianni, Kari Wolfson and Patrick Carlson—walk you through some key things to consider when selecting an accountant, including:

  • How the right accountant can help you optimize your tax planning
  • Which qualifications are most meaningful
  • What special services you may require —and whether a mom and pop can give them to you

Finding an expert who communicates well and has the experience to address your unique needs can make all the difference when it comes to settling up with Uncle Sam. Listen now to learn more!

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

This week, Chairman Dan Wiener was quoted in Ignites about Vanguard’s bonuses, RIABiz about the price hikes on some of their funds and Citywire about their decision to halt their China fund.

Portfolio Manager Adam Johnson appeared on Cheddar News to discuss whether there are any stocks worth buying at bargain prices, while Chief Investment Officer Jim Lowell spoke to Fox Business about the impact of spiking oil prices.  

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade explored Ukraine’s crypto connection, while Steve Johnson offered his thoughts on why boring can be beautiful.

Looking Ahead

The results of the Fed’s meeting will be front and center next week, but in addition, we’ll get a slew of housing-related data (homebuilders’ confidence, building permits, housing starts, existing home sales), regional manufacturing and national retail sales activity reads, as well as leading economic indicators.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Friday, March 11, 2022, prior to the market’s close.

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