Assessing recessions – it will be OK

With school starting and schedules changing again, the carefree days of summer are fleeting. I always reflect on summer vacations and what a great time I’ve had through the years. In light of the recent inflation and market volatility, one particular summer stands out.

As a child our summer vacation usually was spent in Lake of the Ozarks. There we would fish, play mini-golf, recklessly drive go-karts, eat lots of salty, sugar-laden snacks and, of course, swim.

One spring at elementary school, the bell to end recess rang out and I hurled myself off the monkey bars as a matter of efficiency. Two things happened upon landing — I broke my leg in several places and established a lifetime aversion to parkour.

By the time summer vacation arrived, the groin-high cast in place had been reduced to just below my knee. Unfortunately, the science behind waterproof casting had not yet been developed. So, in lieu of breaching the shoreline of the Ozarks with my shin wrapped in fiberglass, I was outfitted with a plaster cast, water-soluble masking tape and a limited supply of semi-permeable bread bags to repel 617 billion gallons of water.

Needless to say, the bags were limited in capacity and function, least of all durability. I made the most of the week poking at my atrophied thigh and taking promos of “all you can eat catfish” quite literally. When I wasn’t on the beach frantically removing water-logged bread bags, I was hand-shoveling enough Missouri clay to form a series of custom-made pots to kiln on the hot stones of the resort levee.

To the point — much like a beach vacation with a broken leg, no one really knows what kind of time will be had in a recession until it’s over.

Definitively, no one knows when a recession starts or ends until through it. By definition, a recession is a decline in economic activity across the economy — basically an unavoidable part of the business cycle.

This is driven by money supply (M2), consumer supply/demand and resulting inflation. Or in other words, a recession is when consumers reduce their purchase of goods and services until prices or interest rates level off to a bottom and supply replenished. This is considered the trough.

Once prices or interest rates reach a point consumers are willing to spend, the cycle will then move to growth and finally expansion before repeating.

That being said, there have been recessions in the past and there will be in the future. According to National Bureau of Economic Research (NBER) data, the average U.S. recession lasted about 17 months in the period from 1854 to 2020.

If only looking at the post-World War II period, from 1945 to 2020, the average recession lasted about 10 months. Regardless of what political party was in office at the time of a recession or policies legislated to effect change, the historical resiliency of the markets — representing growth and expansion — post-recession is indisputable.

Now, this is no guarantee of the future, but history can be a good indicator of what’s to come.

Much like those clay pots resting on the levee, we wait and maybe bake a bit, like feet on hot stones. All the while hoping the ambient temperature and conditions won’t result in the cracking of the economy’s financial framework.

But, even if we enter (or already entered) a recession, we will find a point of equilibrium in the future where things improve. Thumbing a little extra clay to the cracks, making the vessel whole — where prices and rates are more aligned with the perceived value of things we need or want, resulting in market growth.

Basically, the moral of the story is don’t jump off the jungle gym right before summer break. Though economic struggles might exist, investment portfolios reduced and cash possibly eroded by higher costs and rates, stay the course — perseverance is typically rewarded.

Always make sure your goals and objectives are in line with your budget, investment strategy and financial plan. Remember, a recession does not mark the end of anything — in fact, it can be argued it is just the beginning. In the grand scheme of a financial plan, recessions are part of the financial journey.

Hopefully this latest installment finds everyone coming off the summer relaxed, having made good memories and ready to tackle the coming seasons with a rejuvenated soul. Take care and all the best.

Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL Financial or its licensed affiliates. Dupaco Community Credit Union and Dupaco Financial Services are not registered as a broker-dealer or investment adviser. Registered representatives of LPL offer products and services using Dupaco Financial Services, and may also be employees of Dupaco Community Credit Union.