Is U.S. Recession Arriving in 2023 or 2024?

As the world waited for the Federal Reserve to deliver its third “jumbo” interest-rate hike, Bridgewater Associates founder Ray Dalio shared a warning for anybody still hanging on to the hope that beaten-down asset prices might soon bounce back.
 
In Dalio’s estimation, the Fed must continue to substantially raise interest rates if it hopes to succeed at taming inflation. Because of this, and other factors like the ongoing war in Ukraine, Dalio anticipates that stocks and bonds will continue to suffer as the U.S. economy likely slides into recession either in 2023 or 2024. When stocks and bonds suffer, so do many retirement “nest eggs”. This, combined with the rising cost of goods and services, makes it necessary to really take a good look at spending and saving habits. 

Fed Chairman Jerome Powell has pledged that the central bank will do everything in its power to curb inflation, even if it crashes markets and the economy in the process. Dalio addressed this by stating, “…the only way the Fed can successfully fight inflation is by doling out economic pain.”

In the U.S., inflation has eased slightly after hitting its highest level in more than 40 years over the summer, but it’s not the true reprieve that everyone hoped for. Financial markets were sent into a tailspin recently as elements of “core” inflation, like housing costs, appeared more stubborn in October than economists had anticipated. The ongoing energy crisis in Europe has led to even more severe increases in the cost of everything from heat to consumer goods. 

Unfortunately, some might say that increasing interest rates are actually doing more harm than good to our financial assets, investments, and other property assets like real estate.

Simply put, when interest rates rise, investors must increase the discount rate they use to determine the present value of future cash flows, or interest payments, tied to a given stock or bond. Since higher interest rates and inflation are essentially a tax on these future revenue streams, investors typically compensate by assigning a lower valuation. That’s what makes the overall financial markets rise and decline, together. 

Dalio’s recent warning was clear. He, along with many economists, expects that stocks will endure more losses, but that the more immediate area of concern is actually the bond market. 

In September, the Fed set forth a plan to double the pace at which Treasury and mortgage bonds will roll off the central bank’s balance sheet. “Who is going to buy those bonds?” Dalio asked, before noting that the Chinese central bank and pension funds around the world are now less motivated to buy, partly because the real return that bonds offer when adjusted for inflation has moved substantially lower.

So, what can Americans do to help themselves counteract this ongoing financial volatility, as both stocks and bonds continue to lose value? 

Now is a very good time for people to start considering alternatives to bonds. One such alternative, called a Fixed Index Annuity (FIA), is considered to be a “safe money strategy” because of the manner in which an FIA protects consumers’ savings and growth in down markets, while still achieving a reasonable rate of return over time. Annuities can also generate more income than bonds of similar maturity purchased at the same time. And because annuities aren’t priced daily in an open market as bonds are, they can be better than bonds at holding their value while generating a more predictable cash flow.

Additionally, retirees are encouraged to have some cash on hand so as to avoid tapping into their investment portfolio during market volatility, so retirement savers often find value in the fact that accounts like Fixed Index Annuities provide just enough access to their cash (typically allowing a 10% free withdraw yearly) to ensure liquidity needs are met during turbulent times.

In closing, Dalio offered a humorous retort when asked to share his thoughts on where markets might be headed. “There’s a saying: ‘he who lives by the crystal ball is destined to eat ground glass’.”

No one knows what the future may bring but it is important to follow market trends and overall economic circumstances. Especially during uncertain times like we are in now, it may be wise to work with a financial professional who specializes in safety over risk, someone who can assess your portfolio and help you restructure in a way that makes the most sense for you.

We at Summerlin Benefits do this day in and day out with our clients. Call us today so that we can help walk you through your options in a simple, easy to understand way!