Will Interest Rate Hikes Cause A Recession? Here’s How To Strategize

The “R” word invokes fears of job losses, a collapse in the stock markets, and economic pain.

The US Federal Reserve has raised interest rates by the most in 22 years, raising fears that a recession is imminent.

The goal is to contain roaring inflation, but many have expressed skepticism that the Fed will manage to organize a so-called “soft landing” to lower prices without hurting the economy. As those questions swirl, financial advisors say this is a good time to prepare for a potential financial downturn.

“Whenever you go into a period of monetary tightness or moderation, you have to dust off the recession checklist,” said Liz Ann Saunders, chief investment strategist at Charles Schwab. “Everything has a ripple effect, not to mention a psychological effect for the consumer.”

What is recession?

The “R” word invokes fears of job losses, a collapse in the stock markets, and economic pain. Much of this stems from consumers’ relatively recent experiences with the long, slow exit from the 2008 financial crisis, which was called the Great Recession.

A “recession” is a technical term, defined as a shrinking GDP for two consecutive quarters. The National Bureau of Economic Research is the authority that declares a recession in the US, and has its own definition of “a significant decline in economic activity that extends across the economy and lasts for more than a few months.”

Different people will feel the effects of a recession in different ways depending on their circumstances, jobs and locations.

“Many people have gone through many real recessions without really realizing its impact,” said Colin Moynahan, financial advisor at Twenty Fifty Capital in Charleston, South Carolina.

In other words, panicking over the prospect of a recession can be counter-productive. But it pays to be prepared.

spending strategy

Even with recession risks in the air, figures show Americans are still spending at a healthy clip. US inflation-adjusted consumer spending rose unexpectedly in March. And the nation’s largest banks recently reported an increase in credit-card spending in the first quarter.

Advisors say it may be time to cut some of those expenses. This is part of a financial strategy that effectively follows the old adage of “make hay while the sun is shining”.

“The hardest part is changing your behavior consistently enough to move on, versus trying to catch up,” Moynahan said.

This may mean figuring out ways to cut discretionary spending or identifying purchases that are priorities rather than desires. He said holidays and outside food are usually trimmed in the first few areas.

Build your portfolio

In a bearish environment, the classic 60/40 portfolio – 60% stocks and 40% bonds – should shine. That’s because a recession usually signals a rate cut, which bodes well for bond prices. Christopher Grisanti, chief equity strategist at MAI Capital Management, said this is not the case this time, as rising rates have led to a fall in bonds.

“The 40 part that’s supposed to protect you has done as bad as the 60 part,” he said.

Grisanti is a fan of equities leaning more right now, as they often do well in inflationary environments. But he recommends taking too many risks. Those who insist on taking stock should be sure to choose companies that have already reported earnings, he said, because “the market is not forgiving of shortfalls.”

real estate

One of the Fed’s main goals in raising interest rates is to cool the housing market, which has exploded since the pandemic began. In February, the latest month for which data is available, a measure of prices in 20 US cities rose 20.2% from a year earlier.

Is there any point in buying a home with the risk of a recession coming? Buying now may mean locking in mortgage rates before they rise even higher. But it can also mean taking out a loan for an asset when prices are high, only to see its value decline in the coming months.

Everyone’s situation is different, but advisors generally say buy a home that you can afford and you plan to live in for a long time, even if there is a recession ahead. Buying a house that you plan to keep for a few years may not be.

Moynahan of Twenty Fifty Capital says that to stay for a period of about five years, the home buyer would need to depreciate that property in value and appreciate enough to make a profit. This will become even more difficult if a slowdown strikes in the coming months and the demand for housing subsides.

should you leave?

At this point in the great resignation, many people have already left jobs they can’t afford. Those who fear a recession in the coming months may worry that leaving their roles now could put them in a recession-ridden job market, not being easily rehired. could. Advisors say those fears have been overcome.

“We are not seeing any reduction in strong employment conditions,” Grisanti said. “This is the best time in a generation to be an employee.”

In March, US employers saw a record level of job openings, with 1.9 jobs available for every unemployed worker. At the same time, wages and salaries increased by 4.7% in the first quarter.

Still, not all industries will respond to a recession, said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. Consumer-focused industries such as retail and hospitality may be more risky in terms of job stability.

“If the company is very tied to the economy, I would think carefully about that leap,” he said. “Even if they say you have a job now, they may have less next year.”

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