This week on The Money Puzzle Podcast we explore “Is there anything good about a recession?”. A recession is not necessarily fun but when you look at just like a natural economic cycle, the evolution of the economy, the evolution of a business cycle in and of itself, a recession is a part of a healthy economy. Correct? Because as things go up, they get to a saturation point and they then need to come down to correct themselves.
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Speaker 1 [00:00:01] All right. Welcome back to the Money Puzzle. I am Chris Vaughan, along with my partner Eric Douglas here at Family Wealth Planning Partners. Thought we’d talk today, just a little conversation we were having earlier. It’s all over. The news about recession is coming and all that stuff and everybody’s panic. And, you know, the sky is falling. The sky is falling. And Eric pointed out something. Why is that a bad thing? So, all right. I totally agree with you, but explain what you mean by it’s not a bad thing.
Speaker 2 [00:00:29] Well, I don’t want to say that it’s not a bad thing in the moment there. No. Yeah. I’m not necessarily saying that they’re fun or they’re they’re a good thing. But what I mean that when you look at just a natural economic cycle, the the evolution of the economy, the evolution of a business cycle in and of itself, a recession is a part of a healthy economy. Correct? Because things go up, they get to a saturation point. They need to come down to correct themselves. Typically what you see is an expansion of the business cycle or an expansion of the economy. So, you know, if we start here right on a on a curve, we go up on a curve and let’s say we go up to ten. Well, it goes up a little bit too high. You need a contraction basically in the business cycle. It’s going to come down to, let’s say, a six and then it’s going to level out a little bit from there. And then it starts over again. The cycle resets. Over time, recessions are a natural, healthy part of the economy. I’m trying to remember the number of how many recessions have occurred in the last 100 years.
Speaker 1 [00:01:31] Oh, it’s like 40 or 50 something crazy.
Speaker 2 [00:01:33] It was. You don’t even.
Speaker 1 [00:01:34] Realize they’re happening this time.
Speaker 2 [00:01:35] Exactly. And most that, you know, obviously some are worse than others. Sure. And let’s be clear. I mean, we’re we’re in a reset. We’re we’re not officially in a recession until probably next week when the data comes out.
Speaker 1 [00:01:46] And we’ve had that discussion by the time the data comes out and they say we’re in a recession. Turns out you’re actually already out of it or.
Speaker 2 [00:01:52] You might even already be recovering from it, but potentially, depending upon how bad it is, and certainly this is not one of the better ones. Yeah, but the market tends to be a leading indicator.
Speaker 1 [00:02:04] Well, okay, so let me go into what something you just said, because I think, you know, you just pointed out there have been a lot of recessions in last year’s, most of which you don’t have any memory of what you remember. You remember 28, you remember 22,001. You certainly remember the 1970s, all of that. Right. You think about things like the Great Depression, the big crash back in 29 and all of the thirties. Most recessions aren’t like that. And, you know, to the point that we were talking about earlier, a recession is a good thing because it helps reset. You know, if you only had growth all the time, everything becomes overvalued. And I think that’s one of the problems that’s going on right now with the people that are a little panicked about their investments. You’ve had more than a decade of run up. And the problem with that is and COVID in the lockdowns accelerated this for a lot of different things, especially tech. You know, things get more and more expensive. The value of those stocks goes up higher and higher and higher. And they’re overinflated. They’re they’re selling for more than what they’re worth. And you’re thinking, oh, look at all the money I’ve made. Yeah, but you’ve made some of it, for lack of a better word, almost in an artificial way and overinflated way. You have to bring that back down to make the market healthy. And sometimes that’s just a little correction. Sometimes it’s a recession. And and to me, it’s almost like, let’s hurry up and get this over with. Let’s let’s rip this Band-Aid off. Let’s have the recession actually happen. Get it out there, and then we can move on.
Speaker 2 [00:03:39] Which is what we talked about a couple of weeks ago when we were analyzing kind of the first half of the year, when we were talking about market conditions, how the Fed is basically trying to raise rates to create a recession because they’re trying to shorten the natural business cycle from maybe seven or ten years down to maybe two or three, because they want to basically hurry up, get the recession here so we can start recovering from the recession because they’re trying to instead of postponing the inevitable, they’re trying to hurry up and get the inevitable here as quickly as possible so they can start getting out of it a little bit more quickly. That’s ultimately what what they’re trying to do. But recessions as a whole, they’re a healthy they’re an indication of a healthy economy. They suck when you’re in them. But at the end of the day, you need to weed, you know, weed, weed out the chaff, right? You need a separate way to separate the wheat from the chaff. Right. So you need to you know, this is the this is once again, just a sign of a healthy economy. You need it. And we think about 0809 and yes, if you were around in this business in that timeframe, it was not fun. There was a lot of people that went through a lot of pain and it was very much not a fun time, economically speaking. But we tend to put so much emphasis on what happened in oh eight, in oh nine that we were. Covered from it. Just a couple of years later. And it spurred economic activity for the next decade. That was unprecedented.
Speaker 1 [00:05:09] Yeah, great point. You know, I just I mentioned a minute ago, for over a decade now, we’ve had this wonderful growth trend. But you have to say a lot of that was because of Otto Reich. You don’t you don’t have that great growth. Had you not had the reset to to get everything corrected?
Speaker 2 [00:05:25] Yeah. I mean, we had banks that were lending out too much money to people that couldn’t pay it back. And they were getting you know, everyone is getting greedy with as much money as they were taking out because we had a very healthy economy at the time. It was overinflated to some degree. Right. And people got a little greedy and it got put in check. Well, it got put in check. You could even say maybe it deflated or over. Deflate it up. However, you know what? I don’t even know if that’s a word or a term, but over deflate it. But it is now. Right. So but we recovered from it and we had an extremely healthy economy for a decade and it was great. Well, all good things need to come to an end. Or at least they need to come to a reset. Right. And even looking at the market as a whole, because so many, you know, we’re talking about the economy and we kind of are relaying about to the stock market a little bit here. But on average, in every four year history of the stock market, on average, you’re going to have three up years. You’re going to have one down. Right. What did we just have in 2019, 2020 and 2021.
Speaker 1 [00:06:26] If I’m not mistaken, the three greatest years.
Speaker 2 [00:06:28] The three highest consecutive years in the market like ever. Right. Okay. We had the best three years in the market. We had an unprecedented, you know, market run up. Yeah. Okay. Well, that needs to reset. Taking away. Taking away. Everything else is happening in the economy. Taking away what happened with COVID and the lockdowns and the economic stimulus and inflation, taking away all of that. We were probably going to have a negative year in the market regardless of any of that stuff occurring because we were due the the economy just needed to naturally contract to some degree. Now we had some other things that occurred.
Speaker 1 [00:07:07] You got to have a catalyst that causes these things to get started.
Speaker 2 [00:07:10] But I think what’s interesting is when you go back to the beginning of the year, what were some of the major headlines that we were looking at before inflation became as big of a headline as it is now? We’re looking at Russia, Ukraine. Okay. Well, here here’s here’s the reality. What’s happening in Russia and Ukraine really should not be affecting the American economy to any degree. We were getting headlines and there were negative headlines, but people were so on edge because the economy was so overinflated. And I think there was a general sense that everyone knew that the economy was over, inflated the stock market specifically, that any negative headline anywhere was going to create some volatility because people were just kind of naturally nervous because, oh my God, we’ve had such a great three years. You know, what’s next? Everyone’s worried about what’s you know, what’s coming next. And, you know, we got hit with Russia, Ukraine, we got hit with inflation, we got hit with the Fed raising rates. You know, we’ve had a number of different things that are occurring this year. I’m not saying any of them are good by any means, but they all contributed. There was a bunch of like little things that are occurring at the same time consecutively that have created a contraction in the economy that is now obviously leading into I’m going to knock on wood, but in all likelihood going to be officially a recession within the next couple of weeks.
Speaker 1 [00:08:33] And remember, we actually did a podcast on this a couple, three months ago when that word was being thrown around a lot. There is no that we can find official definition of what a recession is, but the commonly accepted thing is two consecutive quarters of negative GDP growth. And when I say negative, that means lower than what it had been.
Speaker 2 [00:08:55] So the economy is it’s contracting.
Speaker 1 [00:08:57] Okay. Yes. So you had a great point. You said that historically one out of every four years is a down year. You’ve got three good years and one bad year. Well, and then we just said the last three years have been I think we’re correct in saying the three best years for the markets in history. That tells me that that one year that’s going to correct some of that over inflation, if you will, is going to be a pretty bad year. And so far, that’s what it’s been, I think. And you mentioned Russia, Ukraine, Ukraine, and there have been a lot of other news stories that have come out in this. Those have been scapegoats. And it’s frustrating when we are told by politicians on both sides of the aisle and by news agencies, well, it’s happening because of this. It was happening before those things started.
Speaker 2 [00:09:46] It just it needed it was already happening. Right. But something like that happens. That’s really not that big of a deal. But it gains added importance because everyone wants to they need something to blame everyone. Everyone needs to blame. Something instead of just letting letting these things happen naturally. This is a natural economic cycle.
Speaker 1 [00:10:07] Specifically on that one, I don’t want to downplay when we talk about the Russia Ukraine situation, I don’t want to downplay how horrible that is. Jeremy is absolutely right. That and I feel so bad for those people. I do. But what is going on there did not cause the issues that we’re having here. And I would argue it hasn’t made them worse other than the public opinion being made worse because it’s a scapegoat. We’ve been told, oh, it’s because of this. These things were already going on. This is the natural reset because of things that we’ve done, natural growth, stimulus, we we pump way too much money into the economy over the last two and a half years. That’s where these problems are coming from.
Speaker 2 [00:10:47] And I’m going to add on to something you just said, public opinion. We don’t talk probably enough about public opinion as it relates to the markets now, not the economy. The economy is going to do it is going to do. But on the markets, on kind of a short term basis, on a daily basis, the market reacts to headlines based on public opinion or optimism and or pessimism. Right? And so if you have some negative headlines, whatever they may be, we’re using Russia, Ukraine as an example. But it could be any number of things. It could be some jobs report that comes out that barely misses expectations or whatever, whatever it is you can. There’s a tendency in the market to overreact based on public opinion, at least on a short term basis. Now, once again, we always talk about investments as a long term vehicle, a long term wealth creator. And it is it’s an unprecedented there’s nothing else close to being able to create wealth over a long period of time. As far as the stock market. That’s why we do what we do. That’s why we do financial planning. And, you know, we make sure we’re putting proper risk in place for the portfolios that we’re building. But, you know, you just have to remember that everything on it. So, so going back to the the last three years, so what were the markets down through the first half of 2022? I think 20, the S&P was down 20.6% or something.
Speaker 1 [00:12:09] Something.
Speaker 2 [00:12:10] It was right around 20, 21%. Okay. Well.
Speaker 1 [00:12:13] That was doom and gloom. Horrible.
Speaker 2 [00:12:15] Well, that was 20. That was 2021. 2021. The S&P gained about 20%. Yeah. Okay, great year. Now that year, we’ve lost that. We’ve lost that year from the last six months. Okay. Over the last six months, we still have all the gains.
Speaker 1 [00:12:29] Of the other two.
Speaker 2 [00:12:30] We still have all the gains that we had in 2019 and all the gains that we had in 2020.
Speaker 1 [00:12:34] That’s you know, it’s amazing to me, the people that I’ve talked to, not necessarily clients, just people I’ve talked to in other groups. And I met, oh, my gosh, everything’s so horrible. Okay, let’s compare this to where you were prior to, you know, the COVID lockdowns and those those three years that we’ve been talking about. Go back to prior to this, even with all the losses, you are still most likely way up from where you were. Certainly the markets as a whole, when you look at the major indices, they are all still even with this big downturn, way up from where they were.
Speaker 2 [00:13:06] I had that conversation literally yesterday in a client meeting that I had. I started working with these clients, I want to say three years ago. We came in, obviously, you know, we go through do the review to the you know, talk about performance, obviously. And there’s a lot of discussion around markets in the economy and what we think is going to happen, which is all natural. But we get to the performance part. And obviously I asked him, do you want to see the number? And I said, Yeah, that’s fine. We kind of we’d been looking, we already knew what it was. So we pulled up the performance number and I said, Well, I wanna show you one other number because they were very like, Oh, we’ve lost so much this year. Okay, well, I zoomed out and I think that should really be what we talk about in all of our I’m talking about in all of our meetings. But that really should be what we’re focusing. All of our energy is on zooming out and looking at the market not just this year, but looking at the market over the last three, five, ten years. Because when I zoomed out and showed them their performance over the last three years, they were not negative. They were still very hot, they were still very positive. And they were still in a very a much better position now than they were three years ago. There’s a tendency, so much to focus on what’s happening right in front of us that we lose focus on what’s happened over the longer amount, over a longer amount of time. And that’s what investing is. If you’re investing to get a return over the next six months, that’s not investing. That’s trading. Yeah. As if you’re using in your investments to generate, create and pass on wealth, generate income in your retirement, you have to zoom out and look at and focus on on the big picture. Are your investments better than they were a decade ago, barring something stupid you might have done along the way? And 99 times out of 100, I’m going to assume that you’re in a much, much better position than you were a decade ago.
Speaker 1 [00:14:49] You know, the best analogy to explain that that I’ve heard, I don’t remember who this was years ago, said, look, it’s very simple. If you’re climbing a mountain, what you see is all those little dips that you’re trying to get past, all the danger all the rocks are in the way. You might even see a big crevasse at some place where if you fall down and that is going to be bad crevasse. A crevasse. Okay, I’m being fancy and.
Speaker 2 [00:15:11] Okay, you’ve been very effective. Yeah.
Speaker 1 [00:15:13] But if you back off and you look at the mountain, not from the mountain climbers point of view, but from the spectators point of view.
Speaker 2 [00:15:21] Yeah.
Speaker 1 [00:15:22] That crevasse is still higher than the base. All those little dips and valleys as you go up all still lead up to that big peak. And if you think about it, the markets look like that. The the apologize for my fancy words.
Speaker 2 [00:15:39] Well, I’ll be a little bit less fancy. I’ll take a yoyo. Take that same mountain, that same mountain climber. He’s going up the mountain with a yo, yo, yo, yo, yo, yo. Goes up and down, up and down. All the while the mountain climber continues to go up higher and higher.
Speaker 1 [00:15:53] It’s still going up. Higher elevation.
Speaker 2 [00:15:55] That’s it. That’s the stock market. Yeah. At some point, the yo yo is going to be a little bit lower than it was. It’s going to come back. It always comes back. If you look at the history of the stock market, and that’s the only thing we can look at as history. We, you know, we we we can’t look forward. Obviously, we can guess. But your guess is as good as mine, as good as this producer, Whitney over there. Right. And any of our clients that come in, their guesses as good as ours, nobody knows what’s going to happen. That’s why we look at history. That’s why we look at, you know, all of our investments in a historical context when we’re putting together a portfolio is because when you’re planning, that’s all that you’ve got to look at. But we know based on history and we have a long period of history to look at, we will come out of this. We will rebound. Recessions are a natural, healthy part of the economic cycle.
Speaker 1 [00:16:42] Yeah, I would I would add to that if when I think of the investors who are the great investors, right, the ones who have consistently been the best investors out there. Warren Buffett’s name always comes to the top of that list. Right. And if you read or listen to what Buffett has said over the years, he said that the markets are emotional, they’re pure emotion. There’s no logic to it. The markets as a whole do. So that’s the reason they react and they jump around and they do all this stuff. But let’s apply some intelligence, some logic to it. And that’s the reason we believe in financial planning as opposed to just chasing a return. Yeah, if you lay things out the correct way, you know that there will be some times where the roller coaster goes up and down or the Yo-Yo or whatever analogy you want to use. But over the long term you’re being logical and the logic will always trump the emotion if you give it enough time. My $0.02 worth, you know. So, so.
Speaker 2 [00:17:41] I don’t know. I don’t really have too much else to add on to this topic. I mean, we could go on to economic analysis and all that stuff, but at the end of the day, maybe even by the time this podcast gets published, we might officially be in a quote unquote recession. It is coming. I fully expect that the next economic reports that come out are going to show negative growth, negative GDP growth for the second quarter. Right. It’s not a surprise to anybody. We’re going to see headlines. We’re going to see very negative headlines. Oh, my gosh, the world is falling. We’re in a recession. Everyone with half a brain has known we’re in a recession. You know.
Speaker 1 [00:18:13] This is going to.
Speaker 2 [00:18:14] A quarter is coming so very well. By the time you’re listening to this, we may very well be in one. We’ll come out of it. We always do. There are even and now indicators that we might already be starting to come out of it. There are signs, you know, inflation. There was another really bad inflation number that came out for the month of June or for the month of. Yeah, for the month of June.
Speaker 1 [00:18:37] Yeah, you’re.
Speaker 2 [00:18:38] Right. Yeah, I’m forgetting we’re already halfway through the year. It’s scary how quickly they go now. The older you get. But we’re starting to see signs of deflation or at least disinflation or inflation slowing. Okay, maybe it’s peaked. We are seeing signs of it in the commodities market, which is usually a leading indicator of inflation. We’re seeing some signs of supply chain easing up specifically with, you know, shipping costs is definitely higher in rail and air, but it’s, you know, when you’re shipping goods overseas. In trucking, actually, trucking rates are starting to come down quite dramatically as well. So there are good signs out there if you look for them. Not everything is complete doom and gloom right now. So that’s why I think for the second half of the year is ultimately very, very important in the face of the bad economic headlines that are going to be coming out, that we stick with the plans that we’ve put together and see, you know, stick through it. Yeah, you’re going to be fine. But I would imagine the worst time to make rash decisions is at the bottom of a market.
Speaker 1 [00:19:48] That’s what people did in 2008.
Speaker 2 [00:19:50] And I have horror stories. Oh, yeah, I have so many horror stories from clients that did something back then, not when they were clients of mine. But but but yeah. There’s so many different clients out there that made rash decisions and put themselves in a worse spot. Now, a decade later, if they had just sat tight and.
Speaker 1 [00:20:08] Stuck to the plan, and I think the plan is the key word. So, you know, I’ll kind of wrap up by saying this. The people that have good financial plans are not panicking as a rule. I mean, yeah, it’s natural to be worried. That’s okay. If you don’t have a plan, you probably are looking at the edge of a cliff right now and thinking about it, you know, figuratively, of course.
Speaker 2 [00:20:30] Or at least you certainly don’t feel as.
Speaker 1 [00:20:31] Comfortable, right? You don’t feel comfortable? Absolutely. If you have a good financial plan, then your investments are doing what they’re designed to do. You’re still on your own track. I had a great conversation with a client the other night that they’ve taken a beating. I mean, they really have. And they said, Are we still okay? We ran the numbers and pulled them up. Yeah, they’re still fine because things are positioned based on goals instead of based on return. Yep. Right. And that’s what a financial plan is. So if you are a little bit worried, if you don’t have a plan, even if you’re working with somebody who says they’re a planner, not everybody who says they are actually do planning work. Give us a call, my producer. I’ll throw a number up there, but it’s 502 to 0 05210. We’d love to talk to you. Talk about what a plan actually is, how that would impact you, how it might give you some peace of mind and actually get you to your goals. So we’d love to talk to you. It’s, you know, no charge for a consultation. Just come in and talk to us. You want to wrap things up or add to that?
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