Insights

In The Know Podcast: Are we in a recession? 

October 2022 

DENNIS LEE: Markets, portfolios and investments can be easy to misunderstand. So on the show today, we'll bring you a few minutes from each of BlackRock's top thought leaders to help explain what's happening in markets in simpler terms. Here's what have on the agenda. First, the news in context. How would our top investment strategist describe what's happening in markets to her friends? 

Second: Interesting numbers. This will help bring out the nerd in all of us to put a few facts and figures in your back pocket as it relates to markets. And then last. What should I do? Most often than not, markets are a long game and staying calm amid the storm is your best bet. But still, we often hear … Yeah, yeah. But really, what should I do? So we'll take everything we've heard and try to answer that question for you as an investor. And that's it. Hopefully, by the end, you'll be speaking the language of markets just a little bit more fluently. Welcome to BlackRock's In The Know Podcast.  

If you follow financial news on any given day, you may have a skewed perception on what's going on. News, by its nature, is required to find the story in daily moves. But as we know, as an investor, it's best to zoom out to fully understand what's happening. So joining us for this first section, The News In Context, we have Gargi Chaudhuri, Head of iShares Investment Strategy. You may have seen Gargi in places like CNBC, Bloomberg and other shows.

And essentially I've asked her to be on the show today to help explain what's happening in markets in simple terms. It's a little bit like asking Albert Einstein himself to explain the theory of relativity. But in any case, thank you, Gargi for being on the show.  

GARGI CHAUDHURI: Dennis, it's wonderful to be here. I will try to do my best Albert Einstein impersonation. So today's big question, and it's a question that we've been getting over several months is …Are we in a recession? So Gargi how would you answer that? 

Sure. So I would start off by saying we are not in a recession. And then I would love to go into why we think that we're not in a recession. And what we're looking at to understand when and if we do fall into one. So what is a recession? Broadly, a recession is defined as a widespread downturn in economic activity. 

And I think the word widespread is really important there. And, you know, recently these questions around the U.S. recession have come up over and over again. And we had written an article about “Is the U.S. in a recession,” which is available on iShares.com. And that happened because there were two negative quarters of U.S. GDP. 

However, going back to the definition, it's a widespread downturn. And there's so many areas of the U.S. economy where we're not seeing a downturn at all. So, number one, the labor market, for example, is really strong people are still looking for workers. People are actually finding it hard to find the number of workers they need. And the unemployment rate is at 50 year lows. 

It's only a three and a half percent. So that is a big reason why we think we are not in a recession. Having said that, having said that, around the labor market remaining strong and about 11 million jobs being open in the economy, I will say that there are some areas where we have seen a little bit of weakening right. 

So if you have tried to take out a mortgage recently, you know that interest rates have moved higher. And of course, that has had a severe dampening effect on the housing market. So that is an area that's slowed down. I would also say that manufacturing sectors have shown a little bit of weakness. So there are pockets of weakness in the U.S. economy, but overall, it is not broad enough and wide enough for us to call it a widespread recession or a widespread downturn in activity yet. 

DENNIS LEE: So maybe the follow up question there, is there a big difference between what we're experiencing today and let's say it was classified as a real recession? What would be the big difference in your mind of whether we're in a recession or not? 

GARGI CHAUDHURI: So I think it does matter. Right. So to the extent that if you are laid off from your job because of a recession, because companies are tightening their belts, so to speak, because they're paying higher prices for everything from import of goods to labor. As we all know, inflation has risen to levels, again, not seen since the eighties If companies are laying off people and those people in turn don't get jobs, that obviously has very many cascading effects on many sectors of the economy. 

Right now, though, because of the labor market remaining as strong as it is, people, even if they do get laid off, are able to find other jobs and sometimes at a higher wages So the consumer in the U.S. economy, the consumer is a big part of what drives the U.S. economy, but consumers still feeling pretty OK for the time being. 

Now, if interest rates continue to move higher or if gas prices continue to move higher, that may not be the case. But at today's levels, that certainly is the case. 

DENNIS LEE: Thanks. That's really helpful to to put that into context. I guess maybe a follow up question to that. We're seeing a lot of stock market volatility. So this summer we've seen a little bit of a rally, but we know that stocks continue to end lower on certain days and we know that the Fed may continue to raise rates. What does this all mean for investors? What's what's important and what should they be focused on? 

GARGI CHAUDHURI: I think what investors should keep in mind is that they need to remain invested. So this is probably the worst time to cash out and move to cash. If you were able to do that in the end of December. Congratulations. That's amazing. But if you didn't do that in the end of December of 2021, I would say this is not the time to move to cash. In fact, this is the time that you should perhaps rotate around to different areas of the market that will provide you a little bit more resiliency than others. You know, we're telling investors to perhaps move to minimum volatility sectors of the market where you are likely to have lower volatility and thus allowing yourself to remain invested within the equity markets. But I'll also say that this is another opportunity to add or at least start adding to fixed income. Again, fixed income has traditionally been that part of your portfolio that does well when equities do not. 

Unfortunately, that was not the case in 2022. Both fixed income and equities did poorly. But what happened as a result of the Federal Reserve raising interest rates was that interest rates now have gotten to a point where you can earn a significant amount of income in your fixed income portfolio. So I think that there are opportunities within the market that investors should gravitate towards instead of fleeing the market altogether and moving to cash. 

DENNIS LEE: Yeah. It seems like anytime the Fed announces any new news, there is a bit of volatility. But staying the course through that news is likely important. Let's take your investing commentator hat off for a second. If you were at a cocktail party or any sort of social function, how would you tell someone who doesn't know at all what's going on, what's happening in markets? What's the story that you would tell them? 

GARGI CHAUDHURI: A great question, because when I am at cocktail parties, this is a question that often I would tell them. And look, this is something that people are feeling. I would tell them that the idea that they're paying more for their groceries, they're paying more for bananas, eggs, avocado, you name it, they're paying more for gas prices. They're paying more in rent for their apartment, all of that is, you know, is a result of inflation. 

I would explain that concept of inflation to them. And I would also explain that, you know, this concept of inflation is what the Fed, the Federal Reserve is trying to bring down. Now, hopefully, they will be very successful at it. They have historically been able to be successful at controlling inflation. And in the near term, there will be a little bit of pain in the economy as a result of the Fed needing to do some really difficult things in order to bring inflation back. 

And those difficult things that they need to do are to raise interest rates, which means that we might have to pay an even higher price on our you know, we have student loans that reset where we have a mortgage that resets, or if we're being an interest rate on a credit card or getting a new auto loan, those prices can go up. 

But in the longer term, it'll actually be better because inflation will be contained. So I would actually prepare my friends at a cocktail party to sort of not focus on the next 12 weeks or even the next 12 months, but really the next 12 years, because after all, we're not investing for the for the short term. Hopefully, we're all investors that are looking at, you know, the longer term and playing for the longer term benefits. Of owning these assets, equities, fixed income, real assets, commodities, infrastructure, et cetera, in a diversified way in our portfolio. 

DENNIS LEE: Thanks, Gargi. Super helpful. Thank you so much for joining us today on the show and I hope to have you next time. And thank you for explaining the news and context. 

GARGI CHAUDHURI: Thank you, Dennis, for having me. That was fun. 

DENNIS LEE: It's now time for a segment we call Interesting Numbers. It's the most interesting segment with the most boring name. We're joined by Mark Peterson, Director of Investment Strategy and Education, who publishes the Popular Student of the Market piece, which covers historical insights each month. I highly recommend checking that out on BlackRock.com. Today I wanted to ask Mark about recessions…in the past.  

Both stocks and bonds have been down this year, as we mentioned. But how rare is that exactly? So, Mark, thank you for joining us. Talk to us about this year. How unique has it been? 

MARK PETERSON: Yeah, absolutely. Dennis, thanks for having me. Clearly, both stocks and bonds being down for the year is very unusual. If you look back historically, going back a little bit more than 95 years that we have good data, it's only happened twice for an entire calendar year, 1931 in 1969 for the two periods where both stocks and bonds lost money. 

So very rare to have that happen. You think about it twice over 95 plus years. So not unprecedented but pretty rare historically. And I think the big differentiator this year is just the amount the bonds are down in general. Right. We certainly seen stock market volatility over the years right. Some challenging years. But the fact that bonds, right, are on pace for their worst year ever by a pretty good margin I think is really what sticks out like a sore thumb. 

You look at those other periods where stocks and bonds lost money. Bonds were only down slightly during those calendar year. So it kind of eased a little bit of the pain in those periods where it's a little bit more difficult in this stretch because bonds are down as much as they are. 

DENNIS LEE: Yeah, it does explain why this year is felt so different I think we've somehow gotten used to stock volatility and the pandemic showed that and we saw a rebound there in 2020. But having bonds down this year has been particularly harrowing. We're also hearing talk of a recession, whether we're in one now, whether we'll soon see one. 

But I think people maybe misunderstand what recessions are and how long they last. And your publication has a really neat chart that shows the average length of recession according to history. So if we were to see, let's say not a worst case but a bad case scenario where we do see recession, how long do those typically last? 

MARK PETERSON: 

Yeah, if you look back again over that similar stretch of time that I mentioned, generally recessions lasts a little bit more than a year, but they can come in all different shapes and sizes.  

The Great Depression was closer to four years and you have periods as short as two months that we had back in 2020 in March and April of 2020 when the pandemic was setting in. I think it's also good to look at the length of the expansions economically. 

So the good economic periods, they tend generally to last a little bit more than five years. So that's really the trade off. You get five good years of the economy for a little bit more than a year of recession on average. Generally the expansions have started to last a little bit longer historically as the economy evolves. But again, they do come in all different shapes and sizes. 

I think one of the interesting stretches here is we had the longest economic expansion ever from 2009 to 2020. So roughly that 11-year stretch you had where the economy did very well, it wasn't the best ever economy, fastest growth. But it did last the longest to the shortest recession ever that March and April of 2020 when the pandemic was setting in. 

But generally five years for an expansion, a little bit more than five years to a little bit more than one year of recession is what we've seen historically. 

DENNIS LEE: Those are the key numbers and I'm hearing five and one to five for an expansion and on average one for recessions. People think of markets sometimes as two steps forward, one step back, but it's actually on average in terms of years can be five steps forward and one step back. So that's that's really interesting perspective. I guess maybe the worry is even in one year, let's say our time horizon is fairly short. 

How do stocks typically perform during those recessions? So let's say it's only a year long, but it could be super painful. What do the numbers say in terms of how markets perform during those time periods? 

MARK PETERSON: Yeah, no surprise, right? The market generally doesn't do real well in a recession. Returns are pretty flat historically. If you look at it, you do have some that were negative, some that were positive right. For various reasons. The last three recessions that we've had, you've actually had negative performance during the technical recession. So if you look at the right tech bubble bursting in 2001, that recession stocks were down a little bit less than 1%. So it wasn't terrible, but they were down a lot more prior to the actual recession. But 2008-2009 was a difficult period. Stocks were down about 25% during that recession. And then again in 2020, even though it lasted two months, stocks were down a little bit more than 1%. So you can see again, a little bit of a different story for each period right sometimes you see the recession coming like you did in that tech bubble period. 

And sometimes you don't realize until you're really in the thick of it like we saw in 2008, 2009. And you saw stocks drop a lot more during the recession than prior to the official recession. And I think that's something to keep an eye on. Right, for this period, whether we have or whether we're in a recession or not, if that's the term. 

And I don't think that's really the key question going forward now. It's where we're headed right? Are we going to see a recession, a softer period in the economy due to the Federal Reserve aggressively raising short term interest rates? I think that's really where the market's focused now. 

DENNIS LEE: Well, one thing that stood out to me on some of your charts here is that during recessions on average since 1929 markets have been positive – we had a 1% average return. I know for many of those recessions we did see negative returns. But that was a bit shocking to me that even during recessions on average, you're still not losing money or historically haven't lost money. And that was surprising to me. How does that work? I mean, I guess there's been enough recessions with positive returns. Mark. 

MARK PETERSON: Yeah, I think when you look at the numbers, Dennis, some of the periods that where you did see really poor stock market performance. Right. Some of the big losses, those were in the significant recessions. Right. I think that's really the key, key for stock market performance is how bad is the recession going to be? Right. So if you go back to the Great Depression, right, you had some pretty dramatic losses during that recessionary period. 

You know, you fast forward again, I said 2008, 2009. You saw some pretty big numbers as well. But some of the other recessions in between. Right. Weren't nearly as bad. And those tend to the market does seem to weather those. And you do actually have some positive performance in some of those periods. Where I think the you can see the other side, right, where the recession isn't real deep. It's not nearly as dramatic as some of the most historically noteworthy periods and the market seems to weather those pretty well. 

DENNIS LEE: Yeah. It may also be an indicator that markets tend to rally before the recessions are over. Market sentiment, if it's improving before the actual recession is done, investors may be more optimistic. 

MARK PETERSON: Yeah, I think that's a great point, right? Often times the recession is a pretty lagging indicator, right? When we actually see the damage to the economy where the stock market tries to look forward. And I think it's also good to keep in mind what happened to the market prior to some of these periods. Right. If you had a big run up in stocks prior to these periods where valuations are really high for stocks, right. 

You had a really good stretch for stocks. Often times that can be a challenge, right? Because you're just starting from a really high level on stock prices and all of a sudden you run into a bad economy like you did in 2008-2009. That can lead to some bigger losses as well. So I think you're right. It's you got to keep the full picture in view. 

Right. It's not always purely about the recession. It's also about where you're starting from. Right. How high are valuations, we're where we're at now. And I think that's one thing that we have going for us now, right? Is that we've already had the market correct to some degree. Right, that had bear market territory. So even if we have a recession, we're not starting from sky high levels on stock prices or valuations. 

DENNIS LEE: Well, Mark, super interesting. Thank you for giving us some numbers to chew on. Certainly interesting numbers here: to summarize a few of the things that stood out to me. Stocks and bonds down this year. It's only the third time in history that's happened in the US. The average length of a recession tends to be just over a year, which is maybe shorter than most people think. And then performance during recessions. Of course, some of those recessions deeply negative and the Great Depression and the Great Recession. But on average, surprisingly, 1% returns during those recession recessionary periods over the last hundred years. So thank you, Mark, for joining us as always. And if you'd like to learn more, do visit Student of The Market at BlackRock.com for Mark's monthly publication. Super interesting insights for you to digest there. And Mark, thank you for being on the show.  

MARK PETERSON: Thanks Dennis. 

DENNIS LEE: OK, so we'll wrap up the podcast with our last segment. What should I Do? Gargi says we're not in a recession, but that we may see volatility. So should we be preparing for recession? Should we ignore it and stay the course? Mark Peterson also shared with us that recessions don't last all that long. So joining us for this discussion, we have Carolyn Barnette, portfolio strategist with the BlackRock Portfolio Consulting Team. She and her team consult on thousands of portfolios across the U.S. to help investors reach their goals. And so, Carolyn, thank you so much. It's a big question. It's a simple one. But often when we think about market news and what's happening around the world, we often think about portfolios and what should I do? Is that even the right question? What should an investor do in this environment? 

CAROLYN BARNETTE: Certainly the most important question to be asking as a true consultant, I always like to answer a question with a question. So when you're asking yourself, well, what should I do right now? The second question to ask is, has anything changed for you? Because if the answer is no, if nothing has changed for you in terms of what kind of returns you need from your portfolio, what amount of risk you're willing to take, then the answer is nothing. 

You shouldn't do anything right now because investors, both professional and amateur alike, have tended to be really bad at timing market. You know, we as a people just tend to buy high and sell low, which is the exact opposite of what anybody wants to do. And especially in volatile markets moving as much as these markets have been moving, I'd recommend against trying to time them but that's the answer if nothing has changed for you.  

DENNIS LEE: Want to clarify, if nothing has changed, you mean nothing in your life circumstance. It's not just about how you feel like, because I certainly feel nervous about markets. This is not about my feelings towards markets. This is like if I've lost my job or I have a new dream to buy a second home or something like that. Right. This is like life situations have changed. Is that correct? 

CAROLYN BARNETTE: That's exactly right. Thank you. It's has anything in your life changed? And if something has changed in your life and by the way, there's plenty going on in the world right now and plenty to drive that change, maybe you do need to make a change to the portfolio. And the most portfolio specific ways your life may have changed is things have gotten more expensive with inflation. 

And so if you're finding your portfolio is not delivering high enough returns or is not delivering enough income for you to meet what is now likely to be a higher spending need, you might need to revisit the portfolio to drive higher returns. If you find that, you know, fixed income yields have risen by quite a bit this year, we started the year under 1%. 

We're now sitting over 3% on the agg. If you find that your portfolio is now delivering more in the way of returns than you actually need and you're getting uncomfortable with this risk environment, it might make sense to to start to reduce the risk in the portfolio, given that you can now get more of a return out of your bonds than you could at the start of the year. 

DENNIS LEE: OK, so where are we going for that second point there, Carolyn? Let's say if things haven't changed, is there still something investors should be thinking about for the long term? 

CAROLYN: Yeah, I mean, right now is not the time to reach for returns. We had been in an environment where we really had to work with bonds yielding under 1%. We needed to reach into riskier parts of the market in order to drive what had been a more reasonable return for investors with volatility higher than it has been and yields higher as well. 

You don't need to reach for that that same amount of risk in the portfolio. And so even if nothing's changed, I'd encourage you to look at the portfolio and make sure that there's nothing intended in there that you don't really need. And the other really important thing for now is it's a great time to try to make lemonade out of lemons, because as we all know, as we've all felt, pretty much everything in the world is down, stocks are down, bonds are down, which creates a really compelling case for tax loss harvesting in the portfolio which is where you sell a position at a loss. 

And you can then use those loss, that loss to either offset gains taken in other parts of the portfolio or even a small portion of realized income. So you can realize losses in funds that are down or positions that are down. And then you either have the choice to replace those positions if you still really like it as an allocation with funds or allocations that have a similar mandate, or you can use it as an opportunity to clean up the portfolio. 

So realize a loss in the portfolio in a part of the world that you don't really like, you don't have high conviction in as an investment and then reinvest those dollars in a place that you do like loss. So realizing that loss. 

DENNIS LEE: We hear a lot of investors that were previously heavily overweight, the FAANG stocks that were doing so well for us over the last few years. They have a lot of concentrated risk in that area. And so being able to harvest some of those losses and buy back into still not necessarily taking their portfolio out of tech, but broadening out their tech exposures and reinvesting has been something we've been seeing a lot of advisors doing it's funny because you mentioned, well, we're not trying to buy high and sell low, but with tax harvesting, we kind of are and it feels uncomfortable to do so. 

But I think as you mentioned and as we've heard from Gargi and Mark, it seems like it is a generational opportunity to not only harvest losses from stocks but from the bond portfolio and then reinvest back into those bonds at higher yields as you mentioned, it seems like if we if as an investor, if you haven't done already and you have a long term horizon it's certainly something that is a must in terms of portfolio hygiene. 

CAROLYN BARNETTE: Absolutely. I could not agree more if you haven't yet looked at your portfolio for tax loss harvesting opportunities this year, you absolutely should. And it is talking to advisors last year, they were really overweight growth stocks, all of the things that had done really well up until this year. And it's a great time to trim those down to closer to benchmark rate and balance them out with some of those higher quality, more defensive names. 

DENNIS LEE:  

OK, so let me try to summarize what should I do in just a few seconds here and tell me if I've gone astray? The first is to stay calm and not overreact to what's happening in markets. We often are not great active managers as investors, second harvest losses both from stocks and bonds and reinvest back into those similar strategies to capture some of those losses so that we can reduce our tax impact down the road. 

And then lastly, if life circumstances have changed and you do want to reduce some risk, as you mentioned, bond yields have come up. So your bond portfolio should be working harder for you than it has in the past, which means your stock portfolio which is often more risky, doesn't have to do as much. And so, you know, speak to your financial advisor about your risk tolerance and your long term goals, whether they've changed to see if those changes should be made. How did I do. Does that sound correct? 

CAROLYN BARNETTE: That's perfect. You probably said it even better than I did. So thank you. 

DENNIS LEE: OK, well, thank you. Thank you for the kind compliment. But I appreciate your expertise. And thank you for bringing all that you do to this conversation, because I know you're speaking with advisors and their end-investors every day, thousands of them across the country. So appreciate your time on the show. 

CAROLYN BARNETTE: Thank you for having me. 

DENNIS LEE: And that brings us to our closing bell. That was the sound of a pen pinging a mug on my desk. We clearly don’t have an official sound effect for that yet. But, I guess you'll have to tune in to future episodes to find out what random item I choose to clang next.  

One quick note before we close. You may have heard about COLA in the news. It’s the cost of living adjustment made to Social Security. It’s meant to counteract the effects of rising prices in the economy, also known as inflation. COLAs are typically equal to the percentage increase in CPI, consumer price index, for a specific period.  

Last year, COLA was 5.9%, we expect that to be even higher in 2023. It should be announced mid October. The key here is there’s nothing much to do. If you’ve already filed for Social Security, you will receive the COLA adjustment to your January benefits check. You also shouldn’t base your decision to start filing as it will be baked in either way. 

So talk to your financial advisor about that. It’s not really a good news or bad news situation, it’s simple news. But you don’t have to act on it to get it, and it will be baked in either way.   

That’s all the time we have for today. 

This has been Dennis Lee, head of market insights for U.S. Wealth at BlackRock. We'll see you next time on BlackRock's In The Know Podcast. 

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