Aug. 17, 2023

This paid piece is sponsored by First National Wealth Management.

Aren’t we supposed to be in a recession right now?

Earlier this year, it seemed like we just couldn’t escape talks of an impending recession in 2023. But since it still hasn’t happened, the local experts at First National Wealth Management are here to explain why.

On the latest episode of “Common Cents on the Prairie,”™ chief wealth management officer Adam Cox and trust investments manager Kyle Cipperley are breaking down what causes an economic downturn, what investors should do when one hits and why we never got the recession that experts swore would happen in 2023.

You can read about the three key takeaways from this episode below, watch the full episode on YouTube or Spotify, or listen on your favorite podcast app!

1. Always expect the unexpected

Before we get into what’s happening with the economy right now, we first have to understand how we got to this point. Here’s what Adam and Kyle had to say:

Adam: First, we got hit by the pandemic, and everybody got told to stay home. The government pumped a bunch of money into the system, and we all used it to buy furniture or fitness equipment or whatever the heck we bought.

And the markets took a dump, frankly, right away at the beginning, but then they rallied. The S&P ended at something like 16 percent up for 2020.

Then, 2021 comes. The good times kept rolling. The S&P, again, was up like 27 percent. All-time highs. Everything worked.

And 2022 comes around, and it was like a punch in the face. Kyle, I’d love to get your big takeaways from 2022 because that will help frame where we’re at right now.

Kyle: If you go back to the beginning of 2022, where were we? We had interest rates at zero. You were earning zero on any safe money that you had set aside.

And then in March, the Fed started raising interest rates, and they took rates from basically zero up to 5 percent. They did that because inflation was a lot higher than they wanted it to be, but when you take interest rates up that fast, it breaks stuff.

The lesson from that is that it’s always the stuff you’re not worried about that gets you into trouble with investing.

Going into 2022, nobody was talking about Russia, Ukraine. Nobody was predicting interest rates ending the year around 5 percent, or what have you. So the lesson there is to expect the unexpected — to expect that you’re going to have surprises.

Whether it’s COVID or 9/11, it’s always the stuff nobody’s talking about that causes the biggest disruptions. That’s why we are always expecting one to two recessions a decade.

2. Stop trying to forecast the weather

Especially with how fast mortgage rates have moved up, it seems like everyone expected that we’d be in a recession by now.

On the contrary, inflation appears to be coming down, and the unemployment rate is laying low. So was everyone incredibly wrong, or is it just nearly impossible to predict a recession?

Here’s what Adam and Kyle had to say:

Kyle: I don’t think anyone, including me, expected the stock market to be up 20 percent this year. Part of that is because the big tech companies that were down a lot last year are up a lot this year.

Adam: Particularly if they’re in the AI space, those tech companies seem to be having some outsized gains, and people are really paying attention to that.

One of the cautions that we always give is, well, let’s look back at even recent history, and some of those companies got absolutely crushed last year. So while they are up big this year, they’re just coming back from the lows where they were last year.

But there’s a lot of warning signs out there; all the experts have been breathlessly predicting that we would be in a recession in 2023. I guess the natural question becomes: Where’s the recession?

Kyle: First, it’d be helpful to understand what a recession actually is. It’s one of those words everybody throws around.

There’s actually a committee of eight people called the National Bureau of Economic Research. They get together throughout the year and look at various factors on spending, industrial production, incomes, etc.

Adam: Sounds like a party!

Kyle: Yeah, right. And they decide whether or not we’re in a recession. So far, they haven’t said that we’ve been in a recession — but they don’t ever say we’re in one until it’s already over or it’s already started, so you don’t really know for sure.

Our approach as investors is not in predicting when a recession will come and then trying to sell everything and sidestep it. That just never works, you know?

The way we approach it mentally and the way that we coach our clients on it is that it’s like a snowstorm in South Dakota. We know they’re coming. We know to expect them. We know how we’re going to react when we get them.

But it might not snow the entire month of November — and that doesn’t reduce the chance that we won’t get snow in December.

So we just approach investing and managing our clients’ money in knowing that we’re going to get a recession.

3. Take advantage of opportunities

If you can keep your wits about you when a recession hits, there are going to be times when there’s a lot of money to be made.

This cycle, like all economic cycles, does present opportunities for people — whether that be retirees, younger investors or business owners — and Kyle and Adam have some tips for taking advantage of them.

Kyle: Particularly for our older clients, they’ve been starved for income for a long time. So we’re seeing a lot of opportunities for them to invest in certain types of bonds — to lock in these 5 , 6 percent interest rates.

And on the stock market side of things, I would tell our younger clients to not be nervous about the stock market, even though it looks expensive.

I would tell them to not interrupt that process of always buying, whether it’s in your 401(k) or money that you’re saving every month and investing, due to any worries that you might have about the election or the economy.

Stay the course, be patient, and expect difficult times to come at some point. That mental framework will serve investors well in the future because it’s always served investors well in the past.

Adam: We also work with a lot of people that have liquidity events, and we’ve worked with a lot of families that have sold meaningful businesses.

A few years ago, the options were you can get almost nothing if you keep the money safe or you can put it in the stock market, which felt a little bit like gambling to those who were used to investing in their business and in themselves.

But now, with these liquidity events, they’re able to deploy those assets in a pretty safe manner and still get a really nice return.

Kyle: With these folks who have a liquidity event — they’ve sold a business, they’ve inherited a big chunk of money — and we’ve approached that by thinking of the money in terms of two different buckets.

In the one bucket — we’d call it the safe bucket — that’s where we’re going to put cash, treasury bills and municipal bonds that pay tax-exempt interest.

Then, with what we call the legacy bucket — or the riskier bucket — which is stocks, you’re better off investing it all at once, and that’s because 70 percent of the time the stock market is up.

But we call it the regret-minimization approach, which is to spread out those purchases over time. And that’s what we’ve done with these clients is we’ve taken the eyedropper out and are just slowly investing the money over a long period of time.

That way, if the market goes up, great. On the other hand, if the stock market goes down, that’s awesome too because you’ve got a lot of cash to deploy into stocks.

If you’d like more guidance on preparing for a recession, send the team at First National Wealth Management a note. And check out the episode “4 Strategies for Navigating a Market Downturn” for more tips!

Any comments, insights or strategies discussed in this article are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial advisor.