Advisors prep clients for recession everyone anticipates but nobody can see

With the summer vacation season underway, the stock market blissfully chugging along and the Fed hinting about a less aggressive monetary policy, investors could easily overlook one looming macroeconomic risk: recession.

But for financial advisors charged with overseeing their clients’ life savings and retirement security, the numbers continue to point toward a recession at some point in the coming months, which is a reality most advisors are trying to prepare for.

“The consensus from most analysts is that we’re heading into a recession later this year or early next year,” said Denis Poljak, managing director and wealth manager at Poljak Group Wealth Management.

The simple math that points toward recession can be summed up by record stimulus spending during the pandemic, which drove inflation to historic highs. That forced the Fed to start hiking interest rates and it's now trying to walk a tightrope without a net.

“The Fed is trying to squash inflation and avoid a recession, which we think is pretty unlikely,” said Poljak, who is in the camp of believing a recession, while inevitable, will be “mild or moderate, but a recession is still a recession.”

Measured against the 2008 recession, analysts and market watchers continue to forecast a considerably less severe economic slowdown. And that forecast has been on the books for more than a year, leaving some analysts to describe what’s ahead as the most anticipated recession ever.

Martin Smith, president of Wealthcare Financial Group, points to the inverted yield curve, with two-year Treasury bonds yielding more than 10-year Treasury bonds, as an historically dependable indicator of a recession on the horizon.

But the economy, he explained, has been so saturated with stimulus money it can’t catch up to the point where it needs to be to start slowing down. That oddly fortunate problem is seen as delaying the inevitable.

“It’s difficult to pinpoint the start of a recession, but we are looking at a range from mid-fall to early next year,” Smith said. “As the market increases in this type of economy, the threat of inflation increases and then the Fed will be less inclined to stop raising rates. Then the big shoe drops and the Fed has to start cutting rates.”

Jon Ulin, chief executive at Ulin & Co. Wealth Management, is watching the same data as everyone else, which is why he’s been tilting client portfolios to be “slightly underweight stocks with a bit more emphasis on fixed income and money market instruments yielding nearly 5%.”

“While there may be a basis of economic recovery evolving, we are not going to pivot to be more overweight stocks till there is an all-clear signal,” Ulin said.

With the threat of recession front of mind, Zach Conway, chief executive of Seeds Investor, is advising clients to have enough cash available to weather hardships that could include job loss.

“Basic financial planning should inherently incorporate the possibility of a future recession, especially because none of us have a crystal ball on when exactly one will occur and how specifically it will affect clients,” Conway said. “But most importantly, when markets become volatile in a recession or for any reason, it's critical for advisors to know which clients are most prone to wanting to make knee-jerk portfolio decisions. Having a clear picture of every client's behaviors and biases ensures advisors can proactively engage certain clients who might be particularly reactive to headlines.” 

While it wouldn’t be prudent to try and ride out a recession on the sidelines, Wealthcare Financial Group's Smith said investments should favor quality as much as possible.

“You have to look defensively to where consumers are likely to continue to spend money,” he said. “That won’t be luxury spending, it will be consumer staples, health care, insurance, energy, gold and short-term Treasuries.”

Ann Covington Alsina, founder and principal at CovingtonAlsina, is also getting her clients back to the basics.

“We don't move portfolios much in response to a pending recession; we align portfolios with a client's goals and the time until that goal,” she said. “For a recession, we focus on employability and emergency savings. Paying down consumer debt and having six months' of living expenses in easily accessible liquid assets are more important than trying to time the market.”

Along those same lines of anticipating the emotional roller coaster a recession can trigger, Matt Malone, head of investment management at Opto Investments, said advisors need to be proactive in terms of communications.

“It’s paramount for advisors to establish a strong communication plan with your clients to ensure that classic behavioral finance issues do not disrupt a plan based on long-term goals,” Malone said. “To that end, make sure strategic portfolio allocations are in line with long-term goals and rebalance as needed.”