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- July 2022: We're Officially in a Recession
July 2022: We're Officially in a Recession
Here's a detailed breakdown of everything you should be thinking about to ensure you'll come out of this ahead..
“You make the most of your money in a bear market, you just don’t realize it at the time.”
— Shelby Davis, legendary value investor
In this post, you’ll learn:
Exactly what it means to “be in a recession”
Typically how long these things last
How you should be investing your money
What is a “Recession?”
According to this insightful article by Investopedia, a recession is a “macroeconomic term that refers to a significant decline in general economic activity in a designated region.”
It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.
However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore.
The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
So, has the NBER declared that we’re in a recession?
Well, not quite. We won’t know 100% for certain for another few months. What’s weird about understanding the economic activity of America (gross domestic product) is that it’s not exactly being meticulously tracked — it’s being continually estimated.
The Bureau of Economic Analysis release “estimations” of GDP and corporate profits over a period of time. Despite the first quarter of 2022 ending on March 31, 2022 — the third and final GDP estimate was just released to the public a few days ago on June 29.
Okay — so we’re not in a recession yet?
Well, let me explain. The Federal Reserve Bank of Atlanta maintains a real-time GDP tracker on their website. According to their website —
“The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.
GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.”
Generally speaking, this is a real-time GDP tracker that is continually updated and maintained by the Federal Reserve Back of Atlanta. It’s not the end all be all — but it is a phenomenal tool to help us predict the current macroeconomic climate.
According to their GDP tracker, the percent change in GDP during the second quarter of the year was -2.1% — which confirms two quarters of consecutive GDP contraction.
Is it time to sell the house, put the kids on eBay, and buy canned food?
Haha — not exactly.
Let’s think about this for a moment. Despite the word “recession” having some really terrible connotation and likely puts a pit in your stomach — it’s only a word.
“Recession” derives from the word “recede,” because the economy is not growing anymore but instead receding. That’s all.
However, the economy receding isn’t a good thing either. The last time we experienced a recession was in 2008 and the economy receded so much that unemployment skyrocketed to 10%.
No one was hiring, therefore no one could make money — money they’d spend at stores and local businesses — money these businesses needed to make in order to pay their employees — employees they had to be let go because the business wasn’t making any money.. and the vicious cycle continues.
How Long Does a Recession Last?
11 months.
The economy shrinks for about a year until we begin to see a turn around. Sure — sometimes this is longer (Great Recession of 2008), and sometimes this is shorter (COVID-19) — but you’re looking at about a year.
If you’re interested in reading the entire breakdown on timelines, stock market corrections, etc. the post below does a fairly good job of walking through those things.
To keep things simple for now — it’s important to understand that the stock market is a leading indicator of the economy.
The stock market is all about predicting the future and making our “best guesses.”
If we believe a company is going to double their free cash flow next year because of some incredible innovation they’ve made — it’s not going to take an entire year for their stock price to trade higher, it’ll take only a few days as investors bid up the price to be in range of what they believe is the company’s new intrinsic value.
Here’s an image that illustrates how the stock market performed during past recessions —
The median duration of a stock market correction during a recession was 282 trading day — or about 14 months.
The stock market experiences roughly ~252 trading days per year — this depends on if fixed date holidays land on a weekday or not (4th of July for example). Each month experiences roughly ~20 trading days depending on these holidays, so let’s round up and call it 14 months.
So if the stock market’s performance truly predicts what the economy might soon do — we’ll begin to see a turnaround (hopefully) sometime next summer / fall.
How You Should Be Investing Your Money
You’re smart.
You read the Rate of Return publication and follow me on TikTok — you’re ahead of the curve and want to make the best decisions possible with your money.
If you haven’t already, give this post below a read. It lays out everything you should be considering if your goal is to build wealth over a long period of time.
However, we’re not in our “normal” economic climate — which means we should be factoring a few new things into consideration. Here’s what to consider, in order:
— Build Your Savings Account
Yes, this is the first action item on our list because without a fully-funded savings account you’ll be forced to sell your investments to pay for emergencies.
You know what sucks? Buying a stock and then the price goes down.
You know what really sucks? Buying a stock, the price goes down, then being forced to sell it for a loss because you got a flat tire and didn’t have $600 set aside to pay for a new one.
A savings account doesn’t exist to make you money — it’s for saving you money. It’s your insurance policy. It’s your “I’m good, nothing to worry about here” fund.
Try and build a savings account worth 6 months of your monthly expenses. For some people this is $25K, for others this might be $50K. Everyone’s financial situation is different.
— Pay Off High-Interest Debt
This should always be a priority, but is especially important now. As we head into a recession, there will be a lot of uncertainty. This uncertainty includes unemployment, inflation, geopolitical, etc.
If you lose your job, the last thing you want is a $783 / month credit card payment hanging over you.
Knock out that high-interest credit card debt and free up your monthly cash flow to be better allocated elsewhere.
— Invest, Invest, Invest!
The better place to allocate money on a monthly basis — investing it!
The median size of a stock market correction during a recession is ~24%. That means for about 11 months, the stock market is -24% off. I don’t know about you, but I love getting my shopping done when things are “marked down” or “discounted.” Think of this as the same type of opportunity.
You’re going to need to have money invested in the stock market to retire — might as well invest as much as you can while it’s “on sale,” right?
What to buy for your retirement account (type these into your search bar):
VOO
VTI
VYM
VGT
VUG
What to buy for your personal account (type these into your search bar):
Only allocate money toward the following after you’re maxed out your retirement accounts with the funds above. Read this post to completely understand this process and the ladder of priorities.
DDOG
CRWD
ZS
VEEV
TEAM
ARKK
More ideas and an in-depth explanation as to why these are on my list — found here.
See? Everything is going to be just fine.
However, the folks who aren’t prepared won’t prosper from this once-in-a-decade opportunity.
“Luck is what happens when preparation meets opportunity.” We’ve been preparing for this for several months now — the opportunity has now presented itself.
It’s time to get “lucky.”
If you haven’t yet read this post, it does a fantastic job summarizes everything important we’ve been sharing over here throughout the last ~8 months regarding the recession, bear market, and opportunities they present.
I’ll leave you with this quote I found online —
“You cannot overtake 15 cars in sunny weather.. but you can when it’s raining.”
It just started to drizzle and a thunderstorm is headed our way. Let’s be sure that we’re prepared, executing our plan, and remain disciplined throughout. Once the storm clouds disappear sometime later next year, we’ll find ourselves quoting Shelby Davis (below).
“You make the most of your money in a bear market, you just don’t realize it at the time.”
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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