A Hard Landing Most Likely Ahead
Since the Fed is clearly continuing in its pursuit to beat down inflation, advisors say, it will be left to investment professionals to get ahead of the looming recession story. “Inflation was the strongest risk factor coming into this year,” Blackwell says. “And as we look at the inflation numbers now, it’s really telling a story that we expected.
“A lot of our conversations this year have been deconstructing the GDP number,” he says. “When we look at the real number, the net number that’s growth minus inflation, growth is very robust.”
With that in mind, he has strongly dedicated his investments to real assets and inflation-sensitive assets, like real estate, infrastructure and commodities, he says, adding that he just introduced a high-dividend equity exposure that bumped up dividends and gave clients a value tilt.
“Right now we’re aggressively core, and pretty optimistic over the next 24 months, though it’s sort of an awkward world we’re living in where big numbers are punished and small numbers are celebrated,” he says of the inclination to avoid big swings by being satisfied with more modest, but steady, results.
But there could be tacks in the road, thanks to the Fed doing its yeoman’s work against inflation. “Did they go too far?” Blackwell asks. “We’ll know in six to nine months.”
Grecsek and other professional investors worry more about the Fed overtightening than the folks strolling Main Street. “We are seeing wage pressures elevated, and that’s not good news,” he says. “We always acknowledged the [two-year U.S. Treasury note and the 10-year note] were inverted earlier in the year, but now they’re unambiguously inverted. … The odds of a Fed pivot is low, the odds of a soft landing is low, and the risk of recession is high.”
Grecsek says he used the market pullback earlier this year to upgrade the quality of investments across the board. “And with a horizon of six to 12 years, now is an interesting time to be thinking of Europe,” he continues. “In five years, what’s happening in Europe now will make it a stronger place, not weaker. They’ll have a stronger-knit community and a greater NATO presence. But it’s going to be volatile on the way there.”
Like other investment professionals, he’s been leaning away from tech and growth domestically and more toward value, with healthcare and consumer staples front of mind.
When Clients Worry, Listen
“Recession may or may not be happening, but it doesn’t matter a ton because people and the market are thinking it’s here or coming,” says Chad Carlson, a CFP and president and chief investment officer at BDF Private Wealth in Itasca, Ill.
“We all know the academic answer of what to do in downturns, but we need to have the patience to listen to the concerns of clients,” Carlson says. “We have to say, ‘Yes, we see that, and here’s how it’s expressed in your portfolio.’”
This was the strategy he used in handling client phone calls over inflation concerns, especially with recently retired clients, he says. “We’d turn that question around. Where do they think inflation will be in five years, 10 years? And we’d remind them that their projection is for the next 30 years,” he says. “Once you get them there, they say, ‘Oh, I don’t think it’ll be like this in five years. It’s temporary.’”
It’s the same with recession. “Most of the time, clients are focused on the issue that’s in the front-page headline. If a median recession is a 20% decline, we just had that but bounced back,” he says. “So it’ll have to be worse than that and not bounce back.”
In 2009, one network news channels notably ran a story on how to effectively use Hamburger Helper to make ends meet, and Carlson says that kind of behavior often aligns with a turning point. “There’s capitulation, the ‘Hamburger Helper moment,’” he says. “Then it starts to get better from there. The markets decided it’s enough. We’ve seen that repeatedly.”
While not even close by financial apocalypse standards, that same channel is already producing segments on how to save money by canceling subscriptions, truly enjoying staycations for $30 a day and finding roommates.
So maybe there will be a soft landing after all.