Transcript

Wiser Financial Advisor – Is There Anything Good About a Recession?

Hi Everyone, Welcome to the Wiser Financial Advisor show with Josh Nelson where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, founder and CEO of Keystone Financial Services. Let the financial fun begin!

Recently I had the opportunity to sit down with Certified Financial Planner Jeremy Bush. Jeremy is one of three CFPs here on staff at Keystone Financial Services and we talk about a really interesting question that was posed to us: Is there anything good about a recession? We’re going to talk about strategies that not only will help you get through it but also some things that you can do to take advantage of the season that we’re in. I hope you enjoy this. Have a great week and God bless.

Jeremy: We have an interesting conversation starter about whether a recession is good or bad, and if there’s any good side of a recession.

Josh: People tend to assume that a recession is bad, and there are certainly a lot of bad things about recession. We’re going to hit on a couple of things, not only the macro viewpoint of the overall economy in the world, but also what it means to businesses and to individuals, and how it can actually be a positive thing in the end. But before we talk about it, it does beg the question, what is a recession?

Jeremy: If we look at the technical factor of it, recession is literally just two quarters of a decline in economic activity. Most people qualify that economic activity specifically as Gross Domestic Product or GDP. So, two consecutive quarters of dropping GDP.

Josh: Which we’ve had technically—first quarter, second quarter to two quarters in a row, slightly negative.

Jeremy: There are other indicators out there as well, which I think is where a lot of the confusion around this “recession” is with what the indicators are showing. They’re not all agreeing. So, one indicator of a recession would be high unemployment. Obviously, right now we do not have that issue. We have pretty low unemployment.

Josh: Yeah, if you talk with business owners, they’ll tell you that’s their biggest challenge right now—finding workers. In a lot of cases, they can’t find qualified workers for whatever it is that they’re hiring.

Jeremy: Another indicator though is things like lower asset prices. Whereas some things definitely have dropped in price, some things not so much, right? We have lower production, loss of consumer confidence. So you can see how we’re getting some mixed indicators on this recession. Technically, if we go by the two consecutive quarters of decline in GDP, yes, we’re in a recession. But if we look at all these other indicators, you know, it’s not so cut and dried.

Josh: Yeah, it’s interesting. Even the factors like consumer confidence—they do studies on this; economists do polling, all kinds of stuff. But from a practical standpoint, if you’ve been to the airport recently or been anyplace, it seems like a gazillion people are running around spending money right now. So even though the consumer confidence numbers regarding how people are feeling maybe aren’t so bright right now, we’re seeing people spending tons of money and in fact racking up a lot of consumer debt as they do it. Maybe on a personal level that’s not a good thing, but on an economic level, that actually works out well for a while because 70% of the economy is us just spending money.

Jeremy: And as long as people are willing to spend money, it’s going to keep pushing business forward. And when we look at the market overall, like you said, that’s where 70% of the market comes from.

Josh: And government spending (and we have no lack of that) and business spending make up the rest of the equation. So, consumer confidence is kind of a funny thing. Sometimes it doesn’t match up exactly with what the polling data or the studies show. But overall, those are the things to look at as far as whether we are in a recession or not. You actually don’t always know that you’re in a recession until you’re already in one. We just ran our halftime report, right? And one of the areas that you covered was the fact that there are a lot of predictions of recessions over the years and most don’t actually end up in a real recession.

Jeremy: Yeah, it’s about a 50/50 chance when it comes down to it—a little over 50%. The bad parts of a recession are easy to see. Those are what a lot of people focus on. You know, currency loses value. If the recession lasts too long, it can go into a depression. We haven’t seen one of those in quite some time, thankfully. So, what would be a good side to recession in your mind?

Josh: Overall, if you look at seasons of the year and just cycles in general, that’s analogous to how life works. In the economy, we can look at it from a macro standpoint. If the economy has been through tough times, we’re a lot more resilient as a society, as a country, as an economy. It’s the most adaptable companies, adaptable people, adaptable situations that make it through a recession. If you look back historically, there are a number of companies that end up being born in recessions. And some of the most successful names, like Walt Disney Company, like HP, Google, many were born in the midst of economic hardship. Apple came about, I think it was in the late 70s—and the 70s were not a great decade from an economic standpoint.

Apple was born in a garage and Amazon was born in a garage. A lot of companies are born in garages. Sometimes that comes out of desperation. Sometimes people’s individual situations force some creativity and they come up with a new way to do something—so there are a lot of business ideas. Even in the pandemic, when you had all the economic activity seemingly shut down overnight—that’s what it felt like, at least in the spring of 2020. But also, you look at balance sheets, you look at financial statements for individuals, for businesses, the ones that went into recession weren’t prepared; they didn’t have the buffer. And we’ll talk about that and how it applies to businesses and individuals.

Jeremy: What comes to my mind as positives you can take away from a recession—you nailed it; it’s the innovation factor. It’s the companies that can find the efficiencies of the market and bring that to the consumer because if there’s anything that the market has shown us over the last 100 years, it’s that there’s always someone out there innovating. Fifty years ago, if you would have told somebody, “Hey, the Dow is going to get above 30,000 points,” they would probably think you were crazy. So, when bad times hit, it forces companies to get more efficient and to innovate new processes.

Josh: Yeah, one positive in the early parts of the pandemic was that individual savings rates went up.

People were stockpiling cash. Balance sheets got better. People were paying off debt. So for a while there, that ended up being beneficial, although of course that feeds into the recession rate if we’re not spending as much money. But that’s what we saw. In a lot of cases, people figured out, “You know what? We don’t necessarily have to have both spouses working.” So we’ve seen one of the two members of the household, especially if they’ve got young kids, opting out of the workforce at least temporarily. That has created some shortages. It’s very disruptive but being disrupted does force a lot of creativity.

Jeremy: So for companies that do survive, what areas are they best at?

Josh: That old Wayne Gretzky quote is that he was successful because he skated to where the puck was going, not to where it was right now. And certainly our world is changing rapidly. In every sector you look at, there are a lot of companies—including ours—that need to be making sure we understand what our clients need and keep up with industry trends and what the research is telling us about strategies that would benefit our client situations. So overall adaptability and thinking about who the end customer is and what it is that they need.

Jeremy: Yeah, and I would add in there, probably a lack of debt. That goes for anyone, not necessarily a company, just any person is in such a better cash flow position. If you don’t have debt, you can survive on a lot less.

Josh: Yeah, basically it’s about spending, living below your means, having enough cash to get through the season of wintertime. We follow Dave Ramsey’s Baby Steps a lot. The reason we do that is that it’s a great fundamental way to look at your financial foundation and make sure that, “Hey, when I’m going into winter, (if you think that’s what we’re going into right now), I’m covered.” I think people’s anxiety levels are higher now than what they were for a while. What are the areas, Jeremy, that you would have people focus on to make sure of the base foundation?

Jeremy: You know, we always start with making sure that you have a good emergency cash cushion. A lot of people—especially in America—don’t have any savings. If you’re in that boat, start out with saving up $1000. That might cover it if you have a dog vet bill or something that pops up, or if your kid breaks their arm. There are different kinds of debt. We don’t include mortgages, necessarily, when talking about a debt payoff. But things like credit cards, any kind of revolving debt, the things that suck up your cash flow, are what we want to attack first and foremost, and get those off the books. The less debt that you have, the better off you are and the less money you can live on if you really need to.

Josh: And that applies to businesses as well if they’re way over-leveraged, meaning they have too much debt and they’ve got little cash. By definition, that’s how a company goes bankrupt and that’s how an individual goes bankrupt as well. Certainly we don’t want to see that happen to anybody that we know or care about. So we hope you’re listening to this and take heed of that.

And then the third thing is that we want to build wealth. We want to get to that point eventually, but it’s important to think about. First, do we have a base amount of cash, ideally three to six months’ worth of living expenses? That’s where we want to build up to have all our debt paid off except for the house.

House is a different category and eventually we’ll tell you to pay that off early too. But those base foundation things of having the cash and debt handled, I’m just going to assume that you’re properly insured, you’ve got medical insurance, things like that. So if you’re not sure, of course you need to talk to somebody about that.

After that, moving on to building wealth and of course when you hit a volatile market like this volatile economy, people will see a lot more turbulence in their portfolio. That’s one area we spend a lot of time on in client conversations every day. We talk about this with clients as far as the risk level or their risk number, what they’re comfortable with. Like flying in an airplane, you’re almost certainly going to have some turbulence.

Jeremy: And that risk factor is so important to set—not just set, but constantly review. At least once a year we’re looking at that and saying, “Hey, does it still make sense?” Personally for me, it’s a little bit harder conversation to have the risk talk in down markets with clients, but you also get the best conversations at that same time. It’s more realistic when things are down and when it’s rough. Everybody feels a step or two more risk tolerant and willing to risk more when things are good in the market. But when all of a sudden the market drops by 10 or 20% and you see a negative growth number in your portfolio, that gets pretty real pretty quick.

Josh: Yep. And at the very least, it’s going to be uncomfortable, right? I don’t think anybody enjoys turbulence, and people get really anxious sometimes so it’s important to have those discussions along the way, so that people are invested in the way that they’re comfortable. Whether that’s aggressive or conservative, that’s not our job to tell you. It’s our job to take where you’re comfortable and what your goals are and help you make sure that your portfolio is in line with those.

Jeremy: And additionally, keeping an eye on how long term, down markets don’t last forever, and on the bright side, up markets tend to last a lot longer than down markets. But it is a cycle. It’s just like the seasons of the economy like you were talking about. We do have to take those downtimes when they come along. And if we have that risk set correctly, then it alleviates some of the pressure.

Josh: And we have to remember that no matter how nasty winter is or how cold it is, it’s good to recognize that there’s never been a winter that hasn’t been followed by spring, even if it’s really a bad winter. Same thing with bear markets. We have faith that they will always be followed by bull markets as they always have been. There’s never been a recession that wasn’t followed by an expansion on the other end. The trick is, when people are in the middle of it, they may be wondering, “Well, is this time different? Maybe there really won’t be a spring. Maybe we’re stuck in winter forever and things are never going to get better.”

I’m not wired to think that things are just going to go down and be bad forever. I recognize that it’s part of the deal—and you can actually make some good money. Oftentimes, bear markets are where the most money is made, simply because that’s when you can do a lot of buying. For those of you who are still working, the bear market is a gift in a lot of ways, because if you don’t need the money right away, you’re not forced to sell and you’re a buyer. For example, maybe you’re putting into your 401K each paycheck. Maybe you’ve got some kind of an automatic investment going each month. Maybe you’re

buying your company stock. Whatever it is, you get to take advantage of prices being low.

Nothing is guaranteed. It’s not like we can say you’re guaranteed to make money if you invest during the bear market. But the reality is that if we look through history, people who steadily continue buying can do well. We call that dollar cost averaging when you just continue to buy incrementally whether the market is up, down or sideways. That’s a way you can take advantage of low prices. We’re talking very broad brush on this. Every situation is individual, but we can certainly take advantage of that.

We manage portfolios. That’s what we do as a company. We take advantage of it by rebalancing periodically. That’s just part of being a disciplined investor. You’re rebalancing and you’re selling.

Although it may seem counter intuitive, selling things that went up and buying things that have gone down. Then making sure we’re not getting too far ahead of ourselves with one area that grew too much because that means our risk is getting higher and higher if that one sector keeps going up and is the larger part of our portfolio. So, having that discipline and if you’re a client of ours, we’re doing that for you. That’s part of what we’re doing as advisors is making sure that your portfolio gets rebalanced periodically.

And then, of course, we look for opportunities. There are always opportunities. Every recession is different. You look back to 2008, 2009, in hindsight that would have been a wonderful time to go out and start buying real estate. Would that have felt good at the time? Probably not. Nobody wanted to do that. So, you know, think about the things that are way down right now, tech stocks being one of them. Tech stocks are disproportionately down right now, maybe compared to some other sectors like energy, which is actually going up this year. Or commodities which have gone down. The reality is you don’t want to stick all your money in one area. Our mothers or grandmothers or great grandmothers always told us, “Don’t put all your eggs in one basket.” We want to make sure that we’re always diversified, but if you’re continually buying and looking for opportunities, certainly you can look at situations where there are good high quality companies or sectors that might be way undervalued. Maybe they’re just out of favor right now, and one of the ways that you know that is that nobody wants to buy. Maybe some other sector is. So that’s part of being a disciplined investor is looking at things effectively.

Jeremy: The underlying idea of asking if recessions are good or bad–I would say Yes. There’s a bad side, there’s a good side. It’s just what you take it for. It’s there if you’re looking for it.

Josh: Yeah, I don’t think anybody will tell you that it feels good, but it’s also an opportunity to do something you normally can’t do. And that’s why we’re here. We’re here to guide you, your family, your coworkers. We want to be here to be a resource because we know times can get anxious and scary, and especially if you’ve never been through a recession before. And for those of our listeners that are younger, we want to make sure that we’re here as a resource for you in our role as Certified Financial Planners. We’ve got a team here to support you even for quick class. We’re always available for a quick question that we can jump on the phone with you and maybe just alleviates a bit of anxiety. Maybe it’s not even a question for you; maybe it’s your kid, your parents, or a coworker that you can tell are really anxious. We can spend some time on the phone or in a meeting with somebody and help people make good decisions, but also help them reduce their anxiety. We want to be there for that.

Please share these episodes we’ve created for you. Subscribe on your favorite podcast service, and we always want your feedback. If you can think of topics you’d like us to cover on the Wiser Financial Advisor, let us know. You can email me directly: josh@keystonefinancial.com . Otherwise, Godspeed, have a great week, great day, and just know that there’s always a spring on the other side of it.

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal, or accounting advice. You should consult your own tax legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.