June 23 Update: Recession Outlook

Recession Outlook

Going into the Federal Reserve meeting of June 14-15^th many investors and economists believed the U.S. economy was slowing down and the Federal Reserve would raise rates ½ of a percent in June and July and then reassess in September.  However, the Federal Reserve, perhaps due to intense political pressure to look tough on inflation, raised the Fed Funds rate by ¾ of percent – the largest increase since 1994.  Initially the stock market rallied, but upon further review investors seemed to have decided that the Federal Reserve is moving too aggressively.  We believe the odds of a recession have increased as a result of the Fed’s actions. 

What impact would a recession have on your portfolio?  There are many varieties of recessions.  Our opinion is that corporate America and consumers are in much better shape now than they were going into the past few recessions, especially 2008-2009.  A recession may finally bring interest rates down, which would help bonds recover some of their losses from the year since bond prices rise when interest rates decline. 

Stocks, on the other hand, would most likely decline further from their current value (the average decline of the S&P 500 when the economy enters a recession is about 40%).  Should this happen, it would create the opportunity to rebalance certain portfolios into stocks, when their prices are low.  Of course, predicting the bottom is not possible, but the further stocks decline the less risky they become and adding to stocks that are down 30% or more should provide an excellent entry point for long-term investors.

As we monitor portfolios, we will continue to review the impact of interest rates on bonds and a potential recession on stocks and make changes when we believe they are opportunistic.

For clients who recently retired, you will most likely experience several recessions over the course of your retirement and market corrections every 2-3 years.  Market volatility is an important part of investing and if the portfolios are managed properly, this volatility can often be used in the investors favor over time.  If you are losing sleep or constantly worried about your portfolio you should give us a call as we are here to help you through these challenging times.

Enjoy your summer and take care,

The Bond&Devick Team