On the date of this writing, September 21, 2022, the Federal Reserve increased the Fed Funds rate another 0.75%. This is the third time they have done so this year. For a little perspective; before June, we hadn’t seen a single 0.75% rate hike since 1994 – now we’ve seen three!
I wanted to reach out to you, our valued client, to touch base about the state of the current economy. As I began writing I had a sense of déjà vu – I could’ve sworn I had already written a similar blog. I went back into the archives, and sure enough, I found this blog from January of 2019. As a reminder, the fourth quarter of 2018 was a doozy. From October 1, 2018, through December 24, 2018 (yes – Christmas Eve!), the S&P 500 was down 19.32%. Why? Essentially because President Trump was waging a trade war with China and people were concerned over the Fed raising rates (which it was doing, but only a mere 0.25% at a time). These two forces had investors concerned that a recession was imminent. Of course, this was before COVID and the 2020 election, so it seems like a lifetime ago.
Today, instead of a trade war, we have an actual war between Ukraine and Russia. Instead of 0.25% rate hikes, we have 0.75% rate hikes. If a recession seemed likely in 2019, it seems even more so in late 2022 or 2023.
So, what should we do? Thankfully, sound principals never change. The blog I wrote three years ago is still relevant today. Below are some steps to take if the economy has you concerned.
1) Focus on your personal economy
The broader economy isn’t something we can control. It’s true that the state of the economy can affect us in a huge way personally. However, our actions, political views, or complaints can’t change what’s happening on the national or global scale. Despite this reality, we can greatly reduce our exposure to a slowing economy by focusing on something we can control: our personal finances.
If you feel the economy has topped out and is ready to begin declining, there are plenty of things you can do to help prepare you and your family.
- Pay down or eliminate debt. If you’re carrying high-interest debt like credit cards now is the time to pay it down as much as possible. Hopefully the strong economy has helped your household and you’re making more money now than you were three years ago. Taking this extra income and focusing it on eliminating consumer debt (like credit cards, cars, or campers) will go a long way when the economy turns. First, you’ll have a lower monthly payment if you have less debt, so you won’t need to earn as much each month to make ends meet. Second, if you pay down debt right now, you’re already practicing living on less than you earn, which brings me to…
- Spend less than you earn. This is sound financial advice in every economy, but it’s especially if you feel we’re heading into a recession. Spending less than you earn now both establishes the habit of living below your means and allows you put the excess income away for a rainy day or a longer-term goal like a home purchase or retirement. 1Financial margin helps create a sense of peace in rocky times.
- Build liquidity. If you don’t have a savings account, open one and get a few months of living expenses in there ASAP. If you have enough for 3 months but your gut tells you that this might not be enough, build it up to 6 months of living expenses. Again, make the moves now while the labor market is strong, because it will be a heck of a lot harder once it cools off. Ever tried to paddle upstream after one of your paddles breaks?
- Re-examine your investment portfolio. Does your investment allocation match the timeframe for when you plan on using the money? If your investments have a short timeframe like buying a home in a year or two, or if you’re actively pulling money out because you’re retired, make sure you have enough allocated to conservative investments to cover the need for the next few years. You never want to have to sell stocks in a down market to buy groceries. A proper investment allocation can protect against this.
2) Educate yourself
This is twofold:
First, educate yourself on the economy. Take the time to research what is actually happening so you can make informed decisions. Don’t just read headlines and dive into discussions with friends about the state of the world. Mainstream media are experts at writing eye-catching headlines so people will notice. I feel folks are more and more often taking stances and arguing over issues with which they don’t really understand. If you’re uneasy about the state of the economy, become a well-informed civilian before any actions are taken.
Second, if you’re still in the workforce, continue to educate yourself in your field. If you own a business make sure you’re keeping up with current trends in your industry so you can prepare for and navigate your business through the challenging times that will inevitably come. If you’re an employee, learn more about your specific profession so you can be the best employee in your role at your company. Learn what your company really needs and step into those responsibilities so your superiors notice the value you’re bringing. Do everything you can to show your boss that the company needs your skillset to operate well, even (and especially) in a poor economy.
3) Seek objective advice
No one is an expert on everything. Civilization is as advanced as it is because humans specialize and lean on each other to improve the world for everyone. 2As iron sharpens iron, so one man sharpens another. If you’re not an economic expert, seek out people that are. Express your concerns to them and listen to what they have to say.
We know economies have a natural cycle, so it shouldn’t surprise anyone that we will go through another recession. Whether it happens this year or 10 years from now, it’s wise to prepare for the next one while we can.
1https://legacywealthgj.com/wp-content/uploads/2015/09/Newsletter_Fall-2015e.pdf (Dan’s article on page 5 of our newsletter)
2Proverbs 27:17 NIV
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Daniel Funderburk is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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