The R word

There has been a lot of financial pundits using the "R" word lately. The “R” word is being used when referencing such omi- nous economic conditions such as high inflation rates and a Fed eral Reserve that seems to be on a path to aggressively increase interest rates. The “R” word of course means recession!

Economic cycles are marked with expansion or contraction. Economic expansion are periods where economic output is in- creasing while a recession is a period when there is a significant decline in economic activity. That National Bureau of Economic Research (NBER) is the ovcial score-keeper of economic ex pansions or contractions. Over the last thirty years, there have been three periods of economic recessions lasting an average of just over 9 months. These three periods were then accompanied by an economic expansion averaging 107 months1.

Generally, recessionary economic periods are accompanied by characteristics of higher unemployment rates, falling wages, and declining asset prices such as real estate and stock values. Recessions are bred from overages, or excesses that build up as a result of overconfidence, overspending, oversupply, or over borrowing. These overages lead to unbalanced and unsustain- able economic conditions which are ultimately flushed out and corrected through a recession. This purging of excesses sets that stage for future economic growth and recovery.

The problem with the NBER scoring recession data is that the information is back-dated and it doesn’t forecast future economic downturns. Just like summer storms in Wisconsin, a nice sunny day can turn rainy in very short-order. In times of economic distress, maintain perspective, and be prepared. Short-term uncertainties should be met with an adequate emergency fund. An emergency fund of three to six months of living expenses should be on hand in the event a period of economic hardship such as in loss of employment. A larger emergency fund balance may be pursued if your main source of income is derived from a source that is economically sensitive.

Economic storm clouds can also be a blessing in disguise. As the country song goes, “Rain makes corn, corn makes whiskey…”. If asset prices are declining, strategies such as ROTH conversions or investing new monies to take advantage of lower prices may be appropriate.

It is divcult to detect exactly where we are in the economic cycle or when the next recession will occur. Regardless of where we are in the economic cycle, investors will be served well by clearly defining their investment goals and objectives, diversify ing and maintaining balance, and keeping perspective while also being prepared.

Adam Smit is CERTIFIED FINANCIAL PLANNER™ with Adam Smit Investment Management LLC and a registered principal of LPL Financial. This article is for general information only and not intended to provide specific advice or recommendations for any individual. Securities oered through LPL Financial. Member FINRA/SIPC.

1 – and-contractions


June 1, 2022