Market Correction Vs. Recession


What a whirlwind the past few weeks have been in the market. Over the past three months prior to this article being written in June, the S&P is down 13.5 percent, the Dow Jones is down 10 percent and the Nasdaq is down 18 percent. When looking at year to date, the S&P is down 21 percent, the Dow Jones is down 16 percent, the Nasdaq is down 30 percent, and inflation is up 8.6 percent.

As you might imagine, this is stirring up quite a bit of anxiety in everyone regarding their net worth and income. I am being asked about the cause of this and how long it may take to make up the losses. It’s difficult to predict how long this will last and how long it will take to make up any losses, but the cause is easier to determine.

In my opinion, interest rates rising dramatically, in a short of a period of time, is the primary cause. On June 15, the Federal Reserve Bank increased rates by 0.75 percent - the biggest hike since 1994. Analysts anticipate July to have an even bigger increase. With inflation at 8.6 percent, it is understandable why the Federal Reserve is taking such action. What happens next is anyone’s guess, but the midterm elections are going to have an immense impact on how this all turns out.

We should all be asking, “Is this a recession or is this a correction?” The difference between the two is a matter of time, but also, a correction refers to the stock market whereas a recession refers to the broader economy that includes the stock market. A correction is defined as a short-term event, and a recession is defined as lasting more than a few months, according to the National Bureau of Economic Research. Some analysts agree that we are in the correction phase, but opinions vary on whether this will turn into a recession.

The appropriate way to manage through any type of downturn is to have a plan. This is not the first, nor will it be the last, correction or recession. You should build your portfolio in a way that can handle times like this. You can never completely mitigate market risks out of your portfolio, but you can diversify your portfolio to mitigate as much as possible.

It’s unwise to completely abandon equities in times like this because you realize the loss and you give up the opportunity to overcome inflation. The equity market historically is the most impactful way to offset inflation. We always have some level of inflation. To combat that, we need to have investments that should keep up with rising rates.

While not an increasing straight line, the average return on equities (stocks), historically beats inflation. Your portfolio should not be comprised of 100% equities. Like the old saying goes, “You don’t want to have all of your eggs in one basket.” Other investments like annuities, real estate, and bonds can offset the volatility in stocks. It’s important to include these types of investments in your portfolio.

When the market is down like it is now, you can rely upon these other investments to lighten the blow. I call this red money and green money. Red money represents the stock market and has inherent risks but also upside. Green money offers guarantees like fixed annuities or CDs that pay a guaranteed interest rate. U.S. treasuries like I bonds have interest rates north of 9 percent right now. These investments may offset the risk in stocks.

Determining the balance allocated to each of these investments is critical. I generally use the monthly income a person requires as my starting place. I am a firm believer that your monthly income should come from your green money. Finding a professional who can help you with this is more important than ever. The market has been hot the past several years, making investing look easy. Now that we are entering a period of market correction or recession, having a professional help balance your portfolio provides another resource to help you execute your appropriate retirement plan.

Nothing I could say can make opening your quarterly statement easier with how markets have performed, but understanding that you have built a plan and are executing that plan can make the pain a little bit easier to swallow.

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The views stated in this article are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

Investors should consider their financial ability to continue to purchase through periods of low price levels.

A diversified portfolio does not assure a profit against loss in a declining market.

Guarantees are based on the claims paying ability of the issuer.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.


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