Getting recession ready

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This article was published 09/07/2022 (1545 days ago), so information in it may no longer be current.

The recession is coming — at some point.

Just when is the focus of countless economists.

Still, two straight quarters — or six months — of shrinking gross domestic product is what makes a recession a recession, and it is inevitable.

Economies can’t keep growing foreverl; the likelihood of a recession in the next year is growing. Inflation is running high, and central banks are raising interest rates to cool demand and avoid, well, a recession.

“But the risk is they overdo it,” says Michael Greenberg, portfolio manager with Franklin Templeton Investment Solutions.

“It’s like trying to land a helicopter on top of a pin.”

Central bankers are trying to slow the economy just enough to slow inflation, but not so much they cause a recession.

These efforts aside, a recession will come. It could be next week or decade from now. Given it’s likely to appear sooner than later, a little preparation today couldn’t hurt.

One challenge, however, is in recognizing recessions. They typically only appear in the rear-view mirror.

“In truth we won’t know we are in one until after the fact,” Greenberg explains. After all, only after six months of negative economic growth is a recession official. By then, the worst is often over — at least for investments.

“Markets often react in advance of them, so what we’re seeing with markets down quite a bit today is recession risk being priced in, anticipating its potential arrival.”

To protect your wealth in a recession, asset allocation is critical.

Yes, you could move all your money to guaranteed income certificates (GICs) and high-interest savings accounts to avoid significant market losses.

But you still lose money to inflation, currently running at its highest in 40 years.

As well, you then have to decide when and how to get back into stocks and bonds.

Rather, sticking to “a balanced, multi-asset portfolio that is very diversified” is the way to go, Greenberg says. “But it’s also important to be dynamic.”

In short, stay invested, but be opportunistic so you can buy assets when they are on sale, and sell those peaking in price. The trouble is that buying when prices are falling can feel wrong, especially today when prices are likely to fall even more, Greenberg says.

“Those are our emotions and behavioural biases that we must manage because they push us to do the opposite of what we should be doing.”

Put another way, you need to be disciplined, says portfolio manager Hardev Bains, president of Lionridge Capital Management Inc. in Winnipeg.

“When markets are going up and high, you need the discipline to say, ‘No’ and not get caught up in the hype,” he says. “The flipside is when markets are correcting and opportunities are available, you need the discipline to buy.”

Even today stocks are generally still overvalued as the S&P 500, for example, remains higher than its peak before the pandemic.

Overvalued or not, Bains argues the best approach to managing a recession is having a reasonable investment plan and sticking to it. Lionridge employs a strategy similar to multi-billionaire investor Warren Buffett’s, seeking out reasonably priced, high-quality companies with strong histories of profitability and proven business models. They also typically sell products and services consumers and businesses need in good times and bad.

“Take Unilever,” he says about the maker of Dove soap and similar products. “Sure, when people’s incomes are stretched and prices are going up,” Unilever might sell less stuff.

But still people need soap.

Inevitably people will spend less in the coming months. It’s an outcome of high inflation that leads to slowing sales.

And dropping revenues can lead to falling share prices, and economic shrinkage.

But spending less is not bad financial advice either.

Reducing expenses will certainly help weather a recession.

Winnipeg certified financial planner Doug Nelson at Nelson Financial Planning Corporation says households should focus on two key expenses.

“Often the biggest are food and fuel,” says Doug Nelson, certified financial planner at Nelson Financial Planning Corporation in Winnipeg.

In turn, try to buy groceries on sale as much as possible and use coupons while avoiding higher cost products. Consider transportation alternatives: carpooling, bike riding, walking and using transit to relieve pain at the pumps.

Bring the kids on board with the process too.

“It is a great opportunity to teach them about the real costs of things,” says Nelson.

If it’s hard to cut costs, consider earning extra income: take on a part-time job; have a garage sale; gather up all the spare change the piggy bank and deposit it into the bank so it earns some interest instead of just sitting there doing nothing.

Yet one of the best ways to reduce costs and boost income, especially in a rising-interest-rate environment, is aggressively paying debt.

Even with a fixed rate, low-interest mortgage, paying more than required while eliminating other debts “will give you flexibility at the time of (its) renewal to absorb higher mortgage payments,” Nelson says, referring to the fact borrowers are likely to pay higher rates upon renewal over the next few years.

For some, however, all of these measures may not be enough to weather a recession.

If credit cards are maxed, the line of credit is unmanageable, and there’s scant money for emergencies, debt relief may be in order, says credit counsellor Sandra Fry with the non-profit Credit Counselling Society in Winnipeg.

This doesn’t necessarily involve bankruptcy. Rather debt payment programs like the one offered by Credit Counselling Society can help eliminate interest charges so you only pay the principal.

“Just getting rid of that interest component can save a ton of money every month,” Fry says.

Of course the program also involves helping consumers track expenses to reduce costs and find cash for savings and even more debt repayment.

That’s beneficial, recession or not, though often easier said than done, Fry adds.

“It’s easy in theory but hard in application.”

Yet the effort is well worth it.