Is a Recession on the Horizon?
By Paul MacDonald & Carissa Shivers | PGI Financial Services
“Is there a recession on the horizon?” Arguably one of the most asked questions we’ve been getting over the past few months.
In most cases, we don’t know we are in a recession until we are already on the way out of it. When we look at the facts, there are still a lot of positive things happening in our economy. Consumer spending is up, unemployment is low, business investment is up, corporate earnings are looking good. These indicators combined with many others led to Gross Domestic Product (GDP) being up 2.8% in the fourth quarter of 2022. This sounds promising, but things look different once we take our rose colored glasses off. The important thing to keep in mind is that most of these numbers are lagging indicators, and they are reflections of the past.
On the other hand, there are a few leading indicators that seem to be telling that we are heading towards a recession at some point this year – if we aren’t in one already. Let’s look at interest rates.
As of recently, short-term interest rates are paying more than long-term interest rates. More specifically, the 2-year treasury is paying more than the 10-yr treasury. This is an example of what we call an inverted yield curve. Historically, this has consistently been a leading indicator of a recession.
If you couple rapidly rising short-term interest rates with high inflation and a war in Ukraine, 2023 isn’t looking much better than 2022. It may even be worse.
Rather than focusing on whether or not we are in, or heading into, a recession, one of the most powerful things you can do is prepare yourself and prepare your portfolio. We’ve seen a lot of volatility in the markets over the last 15 months, and we have spent much of our time taking a step back with our clients to ensure they are taking on an appropriate amount of risk. If you haven’t done a stress test on your portfolio in the last few years, there’s no better time than now. What would happen to your portfolio if we went into a recession? What would happen to your portfolio if we experienced another market like 2008? How much of your life savings are you comfortable losing in the market before you can’t sleep at night? More times than not, we’re seeing people are overexposed to risk, and more importantly, not fully understanding how much risk they are taking inside of their portfolio.
Don’t wait until we’re in the thick of it. Now is the time to make sure you have a plan that can weather the storm and have minimal impact on your retirement either now or down the road.