April 2023 Newsletter: Umbrella

Carolanne Chavanne, CFP®

The current economic uncertainty is proving to be a real headscratcher, with many people questioning whether we are already in a recession or if one is coming soon. Many of you have reached out to us to get our take and our recommendations to help you be better prepared. The stormy economic forecasts seem to mirror the very wet winter we experienced in California this year, which makes me think of the song Umbrella by Rihanna, where she sings, “...Now that it's raining more than ever, know that we'll still have each other. You can stand under my umbrella, you can stand under my umbrella”. Mitigating the effects of a potential economic storm is why we are here for you. Let’s spend a little time in this newsletter talking about recessions and what can be done now to protect your financial interests.  

Right now, the threat of a recession brings with it the concern that things may possibly get worse before they get better. Typically, a recession brings unemployment, a shrinking economy, and general economic dislocation. However, persistent inflation, a job market mismatch, and geopolitical crises are clouding the outlook that points toward an impending recession, so it is difficult to really say what is going on. In any case, a recession is a frightening proposition for us all, as consumers generally bear the brunt of a recession's negative impact. 

But here's the important thing to remember: Recessions don't last forever.   

So, who makes the call that we are in a recession? The official decision comes down to The National Bureau of Economic Research (NBER). The general rule they use when declaring a recession is two-quarters of negative gross domestic product (GDP) growth, but that's only one indicator. The US economy experienced those two-quarters of declining real GDP in 2022; however, other economic indicators, such as an unexpectedly robust labor market, have muddied the waters.  

And then there is the debate over whether we are already in a recession. The image below shows details from the global financial crisis of 2008, which illustrates the forward-looking nature of the stock market. The US recession spanned from December 2007 to May 2009. But the official "in recession" announcement did not come out until December 2008—a full year after the recession had started. By then, stock prices had already dropped more than 40%. It is important to realize that equity markets incorporate expectations ahead of economic reports, making stock indices like the S&P 500 and Dow Jones forward-looking economic indicators. 

Another consideration - if we are either in or entering a recession, how long do they normally last? Since World War II, the average recession has lasted ten months, and the image below shows the duration of each recession going back to 1970.  

Also, consider these recent polls, all conducted in late 2022 - Mercer Research Study of CFOs & CEOs showed 87% believe the U.S. is already entering a recession, and Bloomberg's survey of economists concludes that there is a 70% likelihood of a recession. 

 So, why are all these economists and executives preparing for a recession? The conversation began last year when the Federal Reserve determined that inflation would not be transitory but would instead be longer lasting. Since this observation, the Fed has sought to combat rising inflation by increasing interest rates, with mixed success. In recent months we’ve seen slight disinflation, as seen in the chart below.  

Yet another commonly followed indicator of the economy is the federal funds rate. It is one of the most important interest rates in the U.S. due to its effect on monetary and financial conditions (most notably, employment, growth, and inflation). The following chart shows the movement of that rate from 1955—2023.  

Now, with all that said, what should be done to prepare for a recession

First - Keep calm and have faith in your financial and investment plan. Resisting the urge to panic based on the latest negative headline puts you in a much better position to come out ahead in the long term. To help explain this, look at this next graphic. Consider an investor who put $10,000 into the S&P from the period 2003-2022 and left it there, untouched. They would have seen an annual rate of return of 9.8%, which translates to a gain of $54,884. Alternatively, an individual who jumped out of the market – even for a brief time – had a much less successful outcome. Investors who missed as few as the ten best days during that same time period saw their annual rate drop to 5.6%, with a gain of $19,708. Those who missed the 40 best days ended up with a negative return, ultimately losing $1,952. 

Second – Take advantage of higher rates. While rates go up on the spending side, they're simultaneously rising on the savings side as well. For the past twenty years, we were giddy over CDs paying more than 2%. Now we are seeing 6–12-month CDs around 5%. If you maintain a “rainy day” emergency fund and your savings are still in a commercial bank earning less than 1%, consider taking advantage of a high-yield savings account—some earning 3% or more. We have access, through your TD Ameritrade or Schwab accounts, to help you get some of your money into these higher interest-bearing, FDIC-insured investments. 

Third – Stock market returns will always be prone to some volatility, but nearly a century of bull and bear markets shows that the good times consistently eclipse the bad times. From 1926 through 2021, the S&P 500 has seen 17 bear markets (defined as a fall of at least 20% from a previous peak). The declines ranged from -21% to -80%. On the upside, there were 18 bull markets, with gains of at least 20% from a previous trough. These bull markets averaged 55 months in length, and the advances ranged from 21% to 936%.  

The chart below shows that when the bull and bear markets are viewed together, it’s quite clear that equities have rewarded disciplined investors. The stock market's ups and downs are unpredictable, but history supports an expectation of positive returns over the long term. For the best shot at the benefits the market can offer, the strategy should always be to stay the course. 

In our most recent episode of Supercharge Your Finances – Investing for Today vs. Planning for Tomorrow, Carolanne talks about how market volatility is an integral part of investing and how developing a long-term investment strategy goes a long way toward helping provide the confidence you need to stay the course, even during tough times.   

Lastly – If the darkness starts to close in, and the news seems too much to bear, remember we here at Prosperity Wealth Planning are here to help protect you from the storm and calm your fears. If you need to talk to us, please schedule some time.  

News and Upcoming Events  

TD Ameritrade/Charles Schwab Integration     

Here's a quick update on the long-anticipated integration between TD Ameritrade and Charles Schwab. Clients with accounts at TD Ameritrade will be automatically transitioned to Charles Schwab over Labor Day weekend, 2023. Start preparing now by taking the following steps:  

  • If you are a TD Ameritrade client and are not already set up on TD Ameritrade's website, it’s recommended that you do so before the transition so you will have access to the new Schwab client website. 
  • Go to TD Ameritrade advisorclient.com to set up your login ID and password credentials.  
  • Once you have access to TD Ameritrade's website, you will eventually be prompted to create a Schwab client website login ID and password (closer to the transition date).  

Your Transition Timeline

The chart above is a transition timeline to keep you aware of the upcoming changes. Be assured that we are working closely with both TD Ameritrade and Charles Schwab to ensure a smooth transition for our clients. Please contact anyone on the Prosperity Wealth Planning team with questions. 

Texas Client Appreciation Event 

For those of you in Texas, please save the evening of June 8th on your calendar for our 2023 Client Appreciation Event. The celebration will be held at CRU Wine & Food Bar in Plano. We are looking forward to seeing you there!  

Coffee with Carolanne 

The next edition of Coffee with Carolanne will be on May 18th from 5-6 pm PT. Please plan to join us for a lively discussion on our featured topic, “What is holistic financial planning? Why does it matter?”

Supercharge Your Finances – Investing for Today vs. Planning for Tomorrow. 

Episode Four of Supercharge Your Finances – Investing for Today vs. Planning for Tomorrow is now available. The four-part series examines timely topics about past market performance and the benefit of riding out rough patches. Segments include: Lessons from the Past, Timing the Market, Time In, Not Timing, and What’s Your Plan? Click here to watch all the Supercharge Your Finances videos on our newly redesigned website.  

 Articles of Interest  

Bear Markets and the Threat of Recession: What You Need to Know.
America's in a Recession: Should you Retire Early?
Teaching Children Financial Literacy

Financial Literacy Month

5 Steps for Handling an Unexpected Tax Bill 

Spring is in the air, and there is hope that we won't need to keep those umbrellas handy too much longer. We are looking forward to seeing all of our Texas friends in June. See you soon! 




By Carolanne Chavanne, CFP®

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