Investments

Recession Fears Remain High for the Holidays

By Chris Duderstadt

December 22, 2022

Recession Fears Remain High for the Holidays


Key Points – Recession Fears Remain High for the Holidays

  • Have a Happy Holiday Season!
  • 50 Basis Point Rate Hike Announced at December FOMC Meeting
  • Market Reactions Following Fed Funds Rate Hike
  • Inverted Yield Curve Shows That Recession Fears Remain Hot
  • What Does This Mean for 2023 and Beyond?
  • 7 Minutes to Read



Merry Christmas and Happy Holidays!

While our focus of this article is ongoing recession fears, we want to start out by wishing you and yours a very merry Christmas and a happy holiday season. We hope you stay warm, safe, and enjoy time with your loved ones during the most wonderful time of the year.

Somewhat of an Early Christmas Gift from the Federal Reserve?

There’s no doubt that 2022 has been a rough one for the stock and bond markets with inflation wreaking havoc. In effort to slow inflation, the Federal Reserve has raised the Fed funds rate from zero at the beginning of the year to 4.25-4.50% target range. The first move was a 0.25% hike in March. That was followed by a 0.5% increase in May. Federal Reserve Chairman Jerome Powell then announced 0.75% hikes at the next four FOMC meetings until dropping back down to a 0.5% increase at last week’s FOMC meeting.

The initial reaction from the markets following the 0.5% hike was positive, but there’s still a great deal of economic uncertainty heading into 2023. Powell has said for a few months now that the Fed’s number one goal is to kill inflation, but it certainly isn’t looking like that can happen without also destroying the economy. So, even though recession fears remain high, that isn’t the Fed’s utmost concern.


Recession Fears Remain High for the Holidays
on America’s Wealth Management Show


Why These Recession Fears Are So Conflicting

As Dean Barber and Bud Kasper discussed the December 13-14 FOMC meeting on America’s Wealth Management Show, they said they believe that the Fed funds rate will remain high throughout 2023 and into 2024. Only time will tell, though. They also can’t say for sure how deep this potential recession could end up being.

We’ve technically met the age-old criteria for a recession in the summer after experiencing back-to-back quarters of negative GDP. But have you been out Christmas shopping lately or to some of your favorite restaurants? Or maybe a concert or a sporting event? It sure doesn’t look like we’re in a recession with how so many people are out and about and spending freely.

The National Bureau of Economic Research also usually declares whether we’re in a recession. So far, they haven’t declared one, and now we’re experiencing positive GDP. So, while there are recession fears circulating, there’s quite a bit of conflicting information to process.

Inverted Yield Curve Serves as One of the Biggest Indicators of a Recession

Those who have paid close attention to the bond market are probably aware that we’re seeing another significant indicator of a recession. We’re talking about the steeply inverted yield curve. Every time we’ve had an inverted yield curve, a recession has followed.

Dean explained back in April that we hadn’t seen an inverted yield curve since late 2019. This is the steepest inverted yield curve since the 1970s. Currently, you can get a six-month treasury at 4.7%. That’s not bad. However, the yield on a 10-year treasury is 3.69%. That should be raising some red flags. You should get more on 10-year treasury than a six-month treasury rather than the yield being more than 1% less.

Other Recession Indicators

The steeply inverted yield curve is far from the only thing that’s causing recession fears. There are several other recession indicators right now as well, including absurd credit card debt, sky-high vehicle repossession, and mass layoffs in tech companies and banks. The decline in the technology sector has been dragging down the S&P 500. This would normally a time to be racing toward bonds, but traditional bonds have fared even worse than the S&P 500 during stretches of 2022.

Understanding What You Own

So, what’s an investor to do amid these recession fears? First, it’s important to remember that a bull market is eventually going to follow this bear market. We can’t stress enough how critical it is to be patient. It’s also crucial to understand what you own and about the potential downside risk you’re taking on.

A Comprehensive Financial Plan

Would you have known the massive difference between the six-month and one-year treasury that we explained earlier? If not, we encourage you to consult a CFP® professional to review what you own and what other opportunities you might have. And if you don’t already have a financial plan, that’s where you need to start. We’re not talking about an investment plan. That’s only a small part of a comprehensive financial plan, which incorporates things like tax planning, Social Security claiming strategies, estate planning, and different types of insurance.

Determining Your Probability of Success

A good financial plan will also assume that there can be poor market conditions at any time during the life of the plan. That’s a key cog of our Guided Retirement System. Within our Guided Retirement System, we will stress test your plan to see if it can survive in economic cycles that are comparable to what we’re currently experiencing. That’s what we call a Monte Carlo simulation. It runs thousands of different iterations and situations against your retirement plan to show your probability of success.

Stress Testing Your Plan

It’s been 40-plus years since we’ve experienced an inflationary period like the one we’ve been going through. With our financial planning tool, we can go back and see how your plan would stack up during times like that, the Dot-Com Bubble, Great Recession, or various other economic downturns. Emotions (recession fears) can run very high if you don’t have clarity of financial plan. That clarity breeds confidence to let you continue living your one best financial life.

Let’s look back at the Dot-Com Bubble really quick just to highlight another example of why understanding what you own matters. In the late 1990s, value stocks weren’t doing much of anything while growth stocks were thriving. Well, that changed in a flash in the early 2000s, as value stocks performed admirably while growth stocks got hammered. That’s because value stocks tend to be more defensive than growth stocks. While value stocks are still down right now, they’re performing much better this year than most growth stocks.

Let’s also look back at the recession we were in 40 years ago. Some of you may remember how the late Paul Volcker put an end to the inflationary pressures of the late 1970s. He did so by raising rates, which led us into a recession in 1982. While that was painful, the bull market that ensued after that essentially lasted all the way up to the bursting of the Dot-Com Bubble (other than the flash market in 1987 … AKA Black Monday).

What Is 2023 Going to Hold?

Powell has a tremendous amount of respect for Volcker. But again, only time will tell if the same strategy that worked for Volcker 40 years ago will work for Powell now. We wish we had a crystal ball to let you know what 2023 will hold, but we don’t. No one does. Back in July, we reviewed four retirement risks that are out of our control. Let’s review those again really quick.

  1. Market Volatility
  2. Inflation
  3. Interest Rates
  4. Tax Rate Hikes

The combo of rising inflation and rising interest rates hasn’t been fun to deal with in 2022, and it could very well remain a big concern for much of 2023. But just because those are two retirement risks that are out of our control doesn’t mean we can’t plan for them. Do you know where your income is going to come from and understand what you own? What would more interest rate hikes mean for you? Those are important questions to ask yourself while recession fears remain high for the holidays.

Going Back to Your Plan

Think about the planning you’ve put into this holiday season. Have you spent more time doing that than financial planning this year? We hope that’s not the case, but it’s an unfortunate reality for far too many people.

We know that the holidays can be a busy time of the year. Still, if you have the chance, having a quick family discussion that’s focused on various aspects of estate planning is one you likely won’t regret having in the long run. The beginning of the new year is also a good time to review tax planning opportunities. So many people pay way more in taxes than they need to just because they don’t understand what opportunities are available to them.

What Works Best for Someone Else’s Plan Doesn’t Mean It’s the Best Option for You

We’ve been doing a lot of Roth conversions for people who have been doing year-end tax planning for 2022. The tax-free growth from Roth conversions no doubt makes them one of the more appealing opportunities out there. However, they’re not for everyone. A recent client meeting that Dean just had helps explain why that’s the case. He was looking at doing a $20,000 Roth conversion for that person. That’s when he realized that there would be some unintended consequences for that person by doing so. That Roth conversion would have made $10,000 more of their Social Security taxable. You also need to consider things like Medicare premiums when you’re considering Roth conversions.

Are You Accounting for Higher Inflation in Your Plan?

Dean and Bud could go on and on about the pros and cons of Roth conversions and other tax planning strategies. They also can’t stress enough how important it is to properly incorporate inflation into your plan. We hope that’s been one of your financial planning takeaways from the past year.

Dean, Bud, and our other financial advisors have seen way too many instances of people who have only factored in a 2% inflation rate into their plan when first meeting with them. Years like 2022 quickly show why that’s a recipe for disaster. And it’s why we’ve been using an inflation rate of roughly 4% and a 6.5% inflation rate on health care costs when building financial plans. If you haven’t read our article, 10 Ways to Fight Inflation in Retirement, that we published earlier this year, we encourage you to do so. Inflation and recession fears are still extremely relevant as we head into 2023.

Inflation Isn’t Impacting Every Gift!

While inflation has caused Christmas gifts to be more expensive this year, there are a couple of our gifts that inflation hasn’t impacted. We’re giving you the opportunity to use our financial planning tool from the comfort of your own home at no cost or obligation. You’ll hopefully begin to see how a comprehensive financial plan can give you clarity, confidence, and control. Just click the “Start Planning” button below to begin building your plan today.

Recession Fears

START PLANNING

One of our other gifts to you is the opportunity to schedule a meeting with one of our CFP® professionals at no cost or obligation. You can either schedule a 20-minute “ask anything” session or hour-long complimentary consultation. We can meet with you in person, virtually, or by phone. Whether you’re having recession fears or simply want to have a financial checkup, we’re welcome the opportunity to meet with you. We want you to accomplish your retirement goals while taking on the least possible amount of risk.


Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.