During the first week of April 2022, there were two headlines about the possibility of a future recession that made me think about the noise coming from the financial media. These types of headlines are eye catching and normally draw an emotional response but often fall short on any constructive information that is beneficial for investors, their long-term portfolios, and their financial plans.
The first headline comes from CNBC – “81% of US adults are worried about a recession hitting this year, survey finds”.¹ This was a 2-day survey in March of “nearly” 4,000 adults.
The second headline was from an article on Bloomberg News – “U.S. Recession Seen Most Likely to Start Next Year: Survey” with a section in this article titled “2023 Looks Bleak”.² This survey had 525 respondents who identified themselves as either professional or retail investors in the US and Canada.
According to the US Census Bureau, in 2020 there were over 258.3 million adults aged 18 or older. Statistically, these two surveys included small sample sizes (4,00 is .0015% of the US adult population) and drew broad conclusions. And in these two articles, there was no information on how a recession impacts investors, businesses or even their employees. These types of headlines are nothing but noise.
At Prato Capital, we try to help clients and investors tune out this noise. Over the past several years we have discussed economic downturns and their impact on stock market returns for the long-term investor, click on the links to see the articles on our website:
- May 2019 newsletter, “The Flat Out Truth”.
- June 2020 newsletter, “Market and Economic Downturns”.
- March 2022 blog, “Preparing for Volatility or a Recession”.
¹ Carmen Reinicke, https://www.cnbc.com/2022/04/05/most-americans-are-worried-about-a-recession-hitting- the-us-in-2022.html , CNBC, April 5, 2022.
² Felice Maranz and Tatiana Darie, https://www.bloomberg.com/news/articles/2022-04-04/u-s-recession-seen- most-likely-to-start-next-year-mliv-survey, Bloomberg.com, April 4, 2022.
Preparing for the next recession
At Prato Capital, we do not know if a recession will start this year, next year or in 5-10 years. But we believe that any possible effects of a recession can be less impactful over the long-term with proper preparation and planning.
As businesses and corporations see their profits and revenues slow during a recession, they often look for ways to reduce costs. Many times, the employees of these companies become part of the cost cutting process through either pay cuts or layoffs.
Many self-help finance personalities recommend a set amount of funds to help pay expenses during times when layoffs and pay cuts occur. Often these personalities recommend 3, 6 or even 12 months of after-tax pay set aside just in case of any emergency. The problem with these “generic” suggestions of an emergency fund is that everyone is in a different financial position. A family with young children has different financial requirements when compared to empty nesters approaching retirement.
At Prato Capital, we believe the discussion of emergency funds should be part of a conversion with a financial planner and financial advisor as part of a Financial Life Plan (FLP). It may or may not involve having a dedicated emergency or contingency funds. Again, everyone has a different situation, and the problem should be solved individually, not through generic financial advice. This is the power of having a FLP at Prato Capital.
Recessions are a normal part of the economic cycle here in the US. We believe investors should tune out the noise of the media and look for productive solutions to not just any possible recession but be prepared for any financial situation. Being prepared financially starts with a plan.
“If you fail to plan, you are planning to fail!” – Benjamin Franklin