Making the Case About a Recession 

Not every economist agrees whether the feared recession is coming, but there is a strong case that investors should prepare for it as an eventuality.  

Why it’s News

Some analysts believe that a recession has already begun. Stephen Frohsin is a partner and owner of Woodmont Investment Counsel, a securities-and-exchange advisory firm in Nashville, Tennessee. He told Leaders Media that the U.S. has likely already been in a recession for months. 

A recession is loosely defined as two-quarters of negative GDP growth, and the first two quarters of 2022 saw a combined 2.5% drop.

“I would contend we are in a recession now. You typically look at GDP growth as a lagging indicator so you don’t know you’re in it for three-to-six months. We’re likely in one now and likely to remain in one for the balance of the year and part of next year,” he says.  

“The market will always look out for six months. Inevitably, the equities market bottoms before the economy does and you see interest rates moving higher–affecting our business, the economy, and consumers. The market will price in anticipation of higher rates.” 

It is likely that the current recession will be relatively short and shallow and that the market will price in changes before it bottoms out. Positive improvement signs to watch out for would be when the consumer price index (CPI)—the most common measure of inflation—drops and employment numbers increase as the economy begins to resettle. The economy will likely begin to repair itself once it senses the Federal Reserve is done raising rates. 

“I would pay attention to the two-year Treasury. It’ll tell you where the Fed is taking short-term interest rates and the market is pricing in the reality that it will take the rate to 4.5%. That affects investors of fixed income and stocks,” says Frohsin.   

On the Other Hand

Treasury Secretary Janet Yellen has a more optimistic read. She said in late October that she sees no signs of a recession. She pointed to other key economic indicators that are very strong, which would countersignal the likelihood of a recession—including GDP and employment numbers. “It’s very natural that growth would slow. And it has over the first three quarters of this year, but it continues to be OK. I don’t see signs of a recession in this economy at this point,” she said. 

As we previously reported, Goldman Sachs experts share this opinion and believe there is only a 35% chance of recession. They say we’re watching a rare moment where the labor market is recalibrating due to unusual circumstances. 

Moody Analytics chief economist Mark Zandi similarly agrees with the more optimistic takes. He’s warned that investors should take precautionary measures against the possibility of a recession in late 2023 due to the Fed, but believes this eventuality isn’t guaranteed. 

“Despite the now rapidly cooling housing market, sinking stock market, and near 40-year-high inflation, Zandi believes the U.S. wasn’t in a recession in the first half of this year, and that it can still avoid the worst of economic outcomes altogether,” says Fortune. 

Possible Solutions 

In the meantime, recessions do offer opportunities for investors. Frohsin warns that returns are going to be modest for the foreseeable future due to high-interest rates but that different investors can find opportunities in poor market conditions depending on their priorities. 

“Investment decisions have to be made case-by-case. Someone in the accumulation phase of investment will find bear markets a gift because you can acquire the capital you couldn’t afford six months ago. For those in retirement, it is a different set of facts. Asset preservation is more the investment objective, but the good news now is that perversely higher interest rates are a gift because you now have the opportunity to earn risk-free returns and investments,” he says.