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Portfolio > Economy & Markets

Is the Economy Going to Crash?

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What You Need to Know

  • Here are the key factors influencing the U.S. economic — and market — situation today.

With the recent volatility in the markets and in the economy, this is a question many people seem to be asking. Some of those asking may be your clients.

The answer, of course, is that nobody knows for certain what the future holds for our economy. That said, there are several key factors influencing the U.S. economic — and market — situation today, which are outlined below: 

Impact of the War in Ukraine on the U.S. Economy and Markets

The situation in Ukraine has affected our economy and our markets and will likely continue to do so, according to many experts. In a conversation with ThinkAdvisor earlier this year, Bob Doll, chief investment officer for Crossmark Investments, pointed to 10 key areas for both investors and advisors to keep in mind in 2022, including: 

  • Inflation.
  • Higher oil prices.
  • The Federal Reserve raising interest rates.
  • The equity market will be down for part of 2022.

We’ve seen the impact of these and other areas of concern that Doll cited. In recent weeks, we have seen a leveling off in inflation in some areas, lower gas prices and a recent recovery in the equity markets. Time will tell where we go from this point forward.

Effects of Inflation on the U.S. Economy

We’ve witnessed the effects of inflation on the U.S. economy in several ways this year.

Continued high inflation is the main reason behind the Fed’s decision to raise interest rates. Higher rates have affected the housing market due to higher mortgage rates. They have also made the cost of borrowing higher for many businesses.

Inflation has affected consumer spending, with major retailers such as Walmart noting that they have seen consumers scale back spending on items like clothing. They expect to see similar cutbacks on other discretionary items like furniture in the near future.

 We’ve also seen significant wage inflation, driving up costs for a number of companies. They, in turn, need to raise prices for their goods and services to keep ahead of higher labor and raw material costs. 

Economic Crashes vs. Stock Market Crashes

An economic crash occurs when the U.S. economy essentially comes to a halt. An economic crash or total collapse is unlikely; the last one we experienced was the Great Depression of the 1930s. Even the financial crisis of 2007-09 was “just” an economic crisis.

Stock market crashes are more common. We certainly experienced one in 1987 known as Black Monday. There were also crashes in 2008 and in 2020 in the wake of the COVID pandemic. And of course the stock market crash of 1929 is said to have triggered the ensuing Great Depression.

We experienced a crash this year as well, with the S&P slipping into bear market territory in June after falling over 20% from its high last November. We have experienced a partial recovery over the past several weeks.

Is the U.S. in a Recession?

Like most economic questions, the question of whether or not we are in a recession is open to debate.

On the one hand, the unofficial but often accepted definition of a recession is two consecutive quarters of a decline in gross domestic product. By that definition the U.S. economy is in a recession, as first-quarter GDP declined 1.6%, followed by a 0.9% decline in the second quarter.

The official declaration of a recession comes from a group of academics from the National Bureau of Economic Research, specifically from its Business Cycle Dating Committee. So far there has been no declaration that we are in a recession, but often these proclamations come months after the fact.

Factors pointing to a possible recession beyond the GDP indicator include:

  • The year-to-date decline in the stock market.
  • High inflation.
  • A decline in consumer sentiment. Economist Gary Shilling recently pointed to an upswing in Google searches for “recession” as an indicator of lower consumer sentiment.
  • Higher overall interest rates that are fueling higher mortgage rates.

On the flip side, Federal Reserve Chief Jerome Powell has consistently insisted that we are not in a recession and points to several indicators of strength in the economy, including robust job growth. The July jobs report showed that the economy added over 528,000 jobs, all but erasing the job losses arising from the pandemic. 

Also on the employment front, the latest unemployment rate in the U.S. was 3.5%. By comparison, the unemployment rate at the height of the 2007-2009 recession peaked at about 10%, with unemployment hitting 14.7% in April 2020 in the wake of the pandemic-induced recession.

Even with higher mortgage rates, the housing market remains robust in many areas of the country, another indicator that we might not be in a recession.

What Should Investors Do Now?

Investors are generally better off taking a longer-term view of their situation than overreacting to any current economic situation. Certainly advisors might work with clients to tweak their portfolios a bit to deal with the current economic and market situation. 

I asked Tyler Aubrey, partner and lead advisor at Define Financial in San Diego, what advice his firm is giving to worried clients during this period of market and economic volatility.

His emailed response was: “Market corrections of greater than 10% have occurred in the S&P 500 in 10 of the last 20 years. Volatility is simply the price of admission to participate in the stock market so it’s best to zoom out and focus on the bigger picture.”

The CFP added: “The S&P 500 was valued at 3,234 on 1/3/2020 and was valued at 4,207 as of market close on 8/11/2022. … That’s 30% in 30 months with a pandemic and loads of other noise sandwiched in between.

“Rejoice over the gains, take what the market gives you, and continue focusing on the things within your control. It’s no surprise to us that the clients most comfortable in times of volatility/uncertainty are the ones with fully funded emergency savings, proper diversification, low investment costs, and a proactive tax planning strategy,” Aubrey explained.

Clearly their focus is on long-term planning and on items that clients can control, solid advice at all times.

Are There Positive Economic Signals on the Horizon?

One positive signal is that according to its July report, the Bureau of Labor Statistics shows that inflation moderated in a number of areas. The overall consumer price index rose only 0.3% for July, the smallest increase in several months. In addition, we’ve seen a bit of a rebound in the stock market over the past four weeks. 

All is certainly not rosy, however. The New York Fed’s Empire State Manufacturing Survey for August shows a decline in overall business activity. While this is just one indicator, it does reinforce that we are not out of the woods yet. 

Is the U.S. Economy Going to Crash? 

Between the impact of the war in Ukraine, inflation and higher interest rates we are experiencing in the U.S. plus the stock market volatility we’ve seen in 2022, it might lead one to wonder if we are headed toward a crash in the U.S. economy. 

While nobody can predict the future, things don’t seem as bad as in the days of the Great Depression or even the Great Recession of 2007-09. That doesn’t mean that we are not in for some rough economic patches, but a full economic crash seems unlikely. 

Regardless of where the economy heads next, and regardless of the label we attach to the current economy, your clients need your guidance to ensure they stay on track toward meeting their long-term financial goals. They need you to be their “rock” of stability regardless of the direction of the economy. 

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor. 

(Image: Shutterstock) 


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